Nigerian giant Dangote Industries Limited (DIL) has been making headlines for some months now, mostly due to the opening of its new refinery.

The $20 billion Dangote Oil Refinery, which started operating in January, has accused international oil companies (IOCs) of sabotaging its operations by refusing to supply it with crude oil, thereby hindering its ability to function effectively. The company has also been hindered by poor investments, sabotage, and vandalism in Nigeria, where sufficient crude supplies are unavailable.

In today’s development, Dangote Industries Limited’s creditworthiness has taken a hit. Fitch Ratings, a leading international credit rating agency, has downgraded the company’s National Long-Term Rating from a stable outlook to an increase in credit risk, a significant blow to the company’s financial standing.

This downgrade comes two years after Fitch assigned an ‘AA(nga)’ rating with a stable outlook to Dangote Industries in May 2022, indicating a very strong capacity for the payment of financial commitments.

‘AA’ ratings denote expectations of very low default risk. They indicate a very strong capacity for the payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

At that time, Fitch also assigned an expected national rating of ‘AA(EXP)(nga)’ to the senior unsecured notes to be issued by Dangote Industries’ Special Purpose Vehicle (SPV), Dangote Industries Funding Plc, contingent upon the receipt of final documentation conforming to the reviewed information.

Now, in its latest report, Fitch Ratings has downgraded Dangote Industries Limited’s National Long-Term Rating from ‘AA(nga)’ to ‘B+(nga)’, marking a major blow to the company’s creditworthiness.

What Does the ‘B+(nga)’ Downgrade Mean?

Dangote Industries Limited’s downgrade from ‘AA(nga)’ to ‘B+(nga)’ indicates a notable increase in credit risk and a higher likelihood of default.

While the company is still meeting its financial commitments, the ‘B+(nga)’ rating suggests a greater vulnerability to deterioration in the business, financial, and economic conditions compared to the previous ‘AA(nga)’ rating.

Fitch said, “The downgrade reflects a significant deterioration in the group’s liquidity position following lower-than-expected disposal proceeds, operational and financial underperformance compared to our prior expectations, also affected by local currency devaluation, and a lack of contracted backup funding to repay its significant debt facilities maturing on August 31, 2024. We view the lack of DIL’s audited accounts for 2023 as a corporate governance issue.”

Fitch also noted that Dangote Industries’s Rating Watch Negative (RWN) reflects uncertainty related to the group’s ability to refinance maturing debt. A lack of tangible steps to refinance or repay the maturing debt could lead to further downgrades.

Fitch noted that a positive rating action is not expected from Dangote Industries until the company’s liquidity position improves substantially.

A Rating Watch Negative action indicates that the rating could remain unchanged or be downgraded upon resolution of the watch.

Reasons for Dangote Industries Downgrade

Fitch cited that Dangote Industries Limited faces immediate debt servicing requirements related to the syndicated loan raised to finance the construction of Dangote Oil Refining Company (DORC), adding that “further delays in meeting the funding requirements would significantly increase the likelihood of financial restructuring or default and lead to further rating downgrades.”

Fitch stated that the major currency devaluation in 2023 caused Dangote Industries to record a looming FX loss of NGN2.7 trillion in 2023 as the company faces a mismatch between USD-denominated debt and domestic revenues. This devaluation is expected to continue at an accelerated pace in 2024, the international agency reported, stating, “The group has senior secured debt raised at subsidiary levels amounting to $2.7 billion at the end of 2023, representing 49% of total group debt.

The debt structure also includes on-demand shareholder loans from its ultimate parent, Greenview plc, amounting to $2.3 billion, representing 43% of the total debt. We view shareholder loans as subordinate debt. The company has also raised senior unsecured debt amounting to NGN350 billion with long-dated maturities in 2029 and 2032 to finance capex requirements.”

The Nigerian National Petroleum Corporation (NNPC) acquired a 7.25% stake in DORC’s project entity for $1.0 billion in 2021, with an option to purchase an additional 12.75% stake by 2024. As the NNPC has not exercised this option, Fitch said Dangote Industries plans to divest this stake to meet its August 2024 loan maturity; however, Fitch said the timely divestment and meeting the imminent maturity are highly uncertain in its view.

According to Fitch, Dangote Industries’ cement production arm, Dangote Cement Plc (DCP), also faces challenges with softer retail demand and increased raw material costs, leading to reduced profitability.

“We expect DIL’s EBITDA margins in cement production to drop further in 2024 following softer retail demand for cement, particularly in the Nigerian market, as well as limited ability to pass on increased raw material costs to consumers. Dangote Cement Plc (DCP) is a DIL-controlled cement producer with factories spread across 10 African countries. Nigeria remains the major contributor to DCP’s consolidated revenues.”

Dangote Industries’s Liquidity and Debt Structure

Fitch reported that as of December 2023 (YE23), Dangote Industries Limited had NGN1.4 trillion (approximately USD3.5 billion) in readily available cash (unaudited), NGN400 billion (approximately USD1 billion) as of March 2024 (1Q24) with no headroom under the revolver facility.

Fitch said it expects Dangote Industries’s free cash flow (FCF) to deteriorate further in 2024 and 2025 due to foreign exchange (FX) fluctuations and high capital requirements.

“Liquidity is insufficient to address upcoming debt maturities. The group plans to finance the substantial syndicated loan maturing in August 2024 through the divestment proceeds of a 12.75% stake in DORC. However, the successful execution is highly uncertain in our view,” Fitch revealed.

Liquidity refers to the ease with which an asset or security can be converted into ready cash without affecting its market price.

Is Dangote Industries Limited going bankrupt?

Fitch said Dangote Industries Limited’s business profile is weaker than that of Votorantim S.A. (VSA; BBB-/Positive) and Alfa S.A.B. de C.V. (Alfa; BBB-/Stable), two similar conglomerates, due to meaningful diversification in Latin America and stable cash flow generation from consumer goods, compared with high exposure to cyclical commodity prices for Dangote Industries’s cement and other business lines.

The rating company noted that the financial structure is weaker than peers’ due to high refinancing risk and a lumpy maturity profile in USD-denominated debt.

While Dangote Industries Limited’s downgrade is a significant concern, it does not necessarily mean that the conglomerate is going bankrupt. However, it does indicate a higher risk of default and potential financial distress.

The company’s ability to refinance its maturing debt and improve its liquidity position will be critical in determining its future direction. Failure to address its financial challenges may lead to further downgrades, reduced access to capital, and increased borrowing costs.

Fitch identified certain factors that could lead to a downgrade of the company’s credit rating, such as failure to take tangible steps to refinance upcoming debt maturities, implementing financial restructuring that resembles default (e.g., debt forgiveness, debt-for-equity swaps), and actual payment default on debt obligations.

While positive rating actions could occur if Dangote Industries Limited refinances or repays its upcoming maturities and significantly improves its liquidity position. (The Guardian: Text, Excluding Headline)

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