GCR accords an initial rating of A-(NG) to Forte Oil Plc and its proposed Series 1 Bonds

28 Jun 2016 In Rating Notifications

GCR accords an initial rating of A-(NG) to Forte Oil Plc and its proposed Series 1 Bonds

Lagos, 28 June 2016—Global Credit Ratings has assigned initial national scale ratings to Forte Oil Plc of A-(NG) and A1-(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings expire in June 2017.

Concurrently, GCR has assigned an indicative public rating of A-(NG) to the proposed Series 1 Bonds; with the outlook accorded as Stable. The indicative bond rating expires in September 2016. The final Bond rating will be accorded upon receipt of satisfactorily signed and executed transaction documents.

RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Forte Oil Plc (“Forte”, “FO” or the “Group”) based on the following key criteria:

Forte Oil Plc ranks amongst the top three players in the Nigerian downstream petroleum industry. Its position is supported by long history of operations, significant assets across the value chain, strong relationships with suppliers, experienced management team and an extensive distribution and retail network.  Nevertheless, the downstream petroleum industry evidences very low levels of domestic refining and a heavy reliance on imports. Combined with the impact of price regulations on petroleum products, the industry has been characterised by high cost of sales (above 80% of revenue) and low profit margins.

Revenue has remained above the N100bn level for most of the review period, being a function of volumes sold and pricing regulations. Thus, as oil prices declined in F15, revenue fell by 27% to N124.6bn, albeit that improved business efficiency, streamlined product procurement processes and increased focus on higher margin products led to an improvement in gross margin from 7.5% in F11 to 14.7% in F15 (F14: 10.9%). As a result, gross profit of N18.4bn in F15, was largely in line with that of F14, while the operating margin also improved from a negative margin in F11 to 5% in F15 (F14: 4.5%), and edging higher to 6.8% in the 3-month period to March 2016 (“1Q F16”).

Supported by substantial enhancement in equity base following the acquisition of Geregu Power Plant, net gearing declined from a peak of 122% at FYE12 to 54% at 1Q F16 (FYE15: 57%).  Similarly, net debt to EBITDA has improved considerably from 611% at FYE13, to 207% at 1Q F16 (FYE15: 295%), on the back of firmer earnings and lower debt. More significant than ratios, however, ensuring sufficient funding facilities are available to cover fuel imports, and managing down the interest cost, are essential to ensuring Forte’s business can operate profitably. To this end, Forte maintains credit facilities with four Nigerian banks, with a global credit facility limit above N60bn indicating adequate funding facilities to meet expected working capital requirements. The net proceeds from the proposed N20bn Series 1 bond issuance will be applied towards refinancing expensive short term debt and retail outlet expansion.

In light of increased pump prices, relatively inelastic and sharply rising demand for petroleum products in Nigeria, revenue is anticipated to jump to N299bn in F16 (and rise at a CAGR of 28% over the subsequent 5-year forecast period), and operating profit to N25.7bn. This should be supported by the removal of subsidies in May 2016, with earnings now anticipated to increase materially as customers will pay market dependent prices. The removal of subsidies will also ease the working capital pressure caused by delayed payments from the FG. Nevertheless, the weakness in the Naira value and scarcity of foreign currency present some risks to budget attainment.

Attainment of targeted product volumes and enhancement of capacity utilisation at the power plant, combined with effective cost management could result in positive rating action if it leads to improvement in the Group’s earnings margins and debt service metrics. Conversely, adverse regulatory changes, foreign exchange policy or other exogenous factors may constrain product volumes and revenue. This could adversely affect earnings and result in liquidity strain or increased gearing metrics, placing downward pressure on the ratings.

As the Series 1 Bonds will be senior unsecured obligation of the Issuer, the Bonds will bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bond rating.

NATIONAL SCALE RATINGS HISTORY
Initial/last rating (n.a)


ANALYTICAL CONTACTS

Primary Analyst
Adekemi Adebambo
Senior Analyst
Lagos, Nigeria
+234 1 462 2545
.(JavaScript must be enabled to view this email address)

Committee Chairperson
Dave King
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
Glossary of terms/ratios, February 2016


SALIENT FEATURES

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the Issuer ratings expire in June 2017 while the indicative bond rating expires in September 2016.

Forte Oil Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Forte Oil Plc with no contestation of the ratings.

The information received from Forte Oil Plc and other reliable third parties to accord the Issuer and indicative bond ratings included:
- the 2015 audited annual financial statements (plus four years of comparative numbers),
- budgeted financial statements for the years 2016 to 2020,
- 3-month unaudited management accounts to March 2016,
- corporate governance and enterprise risk framework,
- industry comparative data
- a breakdown of facilities available and related counterparties.
- a completed rating questionnaire
- in respect of the Bond programme: the Draft Programme Trust Deed, Draft Series 1 Trust Deed, Draft Shelf Prospectus, Draft Series 1 Supplementary Shelf Prospectus, reporting accountants report on historical financial statements.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.COM.NG/RATINGS-INFO. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES.  GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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