GCR Affirms Aarti Steel Nigeria Limited’s Issuer Rating of BBB-(NG); Outlook Negative.

30 Sep 2016 In Rating Notifications

GCR Affirms Aarti Steel Nigeria Limited’s Issuer Rating of BBB-(NG); Outlook Negative.

Lagos Nigeria, 30 September 2016 — Global Credit Ratings has affirmed the national scale issuer ratings assigned to Aarti Steel Nigeria Limited of BBB-(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as Negative. The ratings are valid until August 2017.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Aarti Steel Nigeria Limited (“Aarti” or “the Company”) based on the following key criteria:

Aarti’s performance has been adversely impacted by a particularly difficult operating environment in recent periods, leading to the negative rating outlook assigned to the ratings. Nevertheless, GCR considers the Company’s market position to be supported by the extensive steel industry experience of its key shareholders and management, as well as the ongoing investment in additional capacity, which should see performance and market share improved in the coming years.

Turnover has declined from a high of N16.4bn in F13 to just N9.8bn in F15, well below the forecast. Weak demand was impacted by the election (early in the year) and security challenges, as well as forex shortages and import restrictions. As these conditions have persisted into 2016, turnover shrunk further in 1H F16. Despite lower sales volumes, the shift in business strategy (necessitated by the import restrictions) saw the gross margin increase to a review period high of 18.5% in F15 (F14: 9.0%), as it led to greater efficiencies. Along with tight cost controls, the EBITDA and operating margin increased to 14.6% and 8.3% respectively (F14: 6.1%, 4.6%). Earnings margins have remained robust in 1H F16.

Investment in new capex saw gross debt rise to N4.2bn at 1H F16 (up from N2.8bn at FYE15), with the gross and net gearing rising almost double to 71% and 68% respectively (FYE15: 48%, 39%). Coupled with the impact of the lower earnings, net debt to EBITDA also escalated to 311% at 1H F16 (FYE15: 159%). These gearing ratios remain at the upper end of those for investment grade companies. Furthermore, given the increased utilisation of expensive short term debt, Aarti’s interest coverage ratio fell to 1.1x in F15. While coverage rose to 1.4x in 1H F16, the much higher debt could see interest coverage retract to around 1x for the full year. Such weak coverage is not congruent with investment grade companies.

Aarti reported large working capital releases in F14 and F15, due to difficulties in procuring forex to pay suppliers. With restrictions eased, trade creditors had partly unwound at 1H F16, resulting in a cash outflow, which was partly funded with expensive debt. Thus, a further the unwinding of creditors (and thus cash outflows) can be expected if access to forex normalises. Aarti has an unutilized credit facility in excess of N5bn to meet potential working capital requirements, but drawing on these excessively could negatively impact the rating.

In a bid to revive the industry, the Government of Nigeria is taking active steps to ensure the Ajaokuta Steel Complex (“ASC”), which has been dysfunctional for over two decades, is resuscitated. Once operational, ASC has the potential to become one of the major suppliers of HRC to local steel companies, and thus alleviate over-reliance on import. As such, GCR considers long term industry prospects to remain sound, but the industry is likely to face substantial challenges in the short term, particularly due to import restrictions and currency volatility.

The tough operating environment and delays to capex projects, preclude a possible rating upgrade. Positive rating consideration would be premised on a sustained improvement in earnings over the longer term that allows the company to meet debt service costs and reduce debt. However, downwards rating pressure could emanate from further deterioration in the operating environment such that volumes decline, and Aarti reports operating losses, weaker interest coverage and rising liquidity pressure.

NATIONAL SCALE RATINGS HISTORY

Initial rating (November 2012)
Long term: BBB(NG)
Short term: A3(NG)
Outlook: Stable

Last rating (December 2015)
Long term: BBB-(NG)
Short term: A3(NG)
Outlook: Rating Watch


ANALYTICAL CONTACTS

Primary Analyst
Femi Atere/Adekemi Adebambo
Credit Analyst/Senior Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2016
Aarti rating reports (2014-2015)
Glossary of Terms/Ratios, February 2016

RATING LIMITATIONS AND DISCLAIMERS

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/RATINGS-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 AT WWW.GLOBALRATINGS.COM.NG

SALIENT FEATURES OF ACCORDED RATINGS

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. The ratings expire in August 2017.

Aarti Steel Nigeria Limited 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 rating/s has been disclosed to Aarti Steel Nigeria Limited with no contestation of the rating.

The information received from Aarti Steel Nigeria Limited and other reliable third parties to accord the credit rating included:
• The 2015 audited annual financial statements (plus four years of comparative numbers)
• Unaudited management accounts to June 2016
• Industry comparative data and regulatory framework
• Breakdown of facilities available and related counterparties

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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/RATINGS-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.

 

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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