GCR Affirms Axxela Limited’s Issuer rating of BBB+(NG); Outlook Stable.

04 Oct 2019 In Rating Notifications

GCR Affirms Axxela Limited’s Issuer rating of BBB+(NG); Outlook Stable.

Lagos Nigeria, 4 October 2019 — Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of BBB+(NG) and A2(NG) respectively accorded to Axxela Limited, with the Outlook accorded as Stable. The ratings are valid until September 2020.


RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Axxela Limited (“Axxela” or “the Group”) based on the following key criteria:

The ratings reflect Axxela’s leading position within the Nigerian natural gas distribution market, with the largest gas distribution capacity. The Group’s competitive position is supported by its Nigerian Gas Marketing Company franchise within the core Lagos and Port Harcourt regions, long term distribution arrangements and strong relationship with technical partners.

Following a resolution of the Niger-delta unrest during FY16, Axxela has reported strong revenue growth, supported by rising volumes, higher selling prices and an expanded clientele base. The Group is embarking on several gas infrastructure developments, which should see revenue increase in the coming years, as well as hedge against over dependence on a single supplier. In the interim, operations remain susceptible to supply disruptions and regulatory uncertainties.

Although the gross margin on gas sales witnessed slight pressure in FY18 due to the gas sales mix, the overall gross margin rose to 26.2% in FY18 (1H FY19: 23.8%), underpinned by decline in costs that are unrelated to gas volumes. The strong gross margin filtered through to EBITDA margin, supporting solid earnings growth. Accordingly, operating profit rose sizeably by 61% to N11.2bn in FY18 (1H FY19: N5.4bn), well above historical levels.

Axxela has reported positive cash flow from operation in all years, reflecting the strong EBITDA. Although this has been reduced by working capital absorptions due to related party payables and prepayments. Excluding this, a large working capital release from operating activities was reported in FY18, as debtors were better managed.

Axxela reported negative tangible equity at FY18, although this was compensated by a N22bn convertible shareholder loan provided in FY16 (which represents c.80% of total debt). Treating the shareholder loan as debt, gearing metrics are elevated, with negative equity based gearing and net debt to EBITDA of 229% at FY18 (FY17: 314%). Moreover, interest on the shareholder loan caused net interest cover to register at 3.4x in 1H FY19. Excluding the shareholder loan, net interest cover would be 6.3x, and net debt to EBITDA would register below 30%, creating headroom for additional borrowings given the low external debt of N6.2bn at 1H FY19.

Axxela is far advanced with the plan to restructure its external debt with new debt from the capital market. As debt is expected to rise to N52.6bn by FY19, Axxela could be burdened with excessive debt service obligations if targets are not met. This could exacerbate the risks in the funding structure.

Positive rating action is dependent on strengthening the capital structure through direct equity or other tangible support. The ratings are also sensitive to attainment of forecasts, translating to an improved earnings and debt serviceability over the medium term. Conversely, a delay in rolling out projects and/or reduction in sale volumes would see earnings deteriorate and further cash flow pressure. Excessive debt utilisation would see credit protection deteriorate.


NATIONAL SCALE RATINGS HISTORY

Initial/last rating (September 2018)
Long-term: BBB+(NG)
Short-term: A2(NG)
Rating outlook:  Stable


ANALYTICAL CONTACTS


Primary Analyst
Femi Atere
Credit Analyst
.(JavaScript must be enabled to view this email address)
+234 1 9049462


Committee Chairperson
Dave King
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Axxela Limited Issuer rating report 2018
Glossary of Terms/Ratios, February 2018


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 process 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 ratings are valid till September 2020.

 

Axxela 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 Axxela Limited.

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.

The information received from Axxela Limited and other reliable third parties to accord the credit ratings included:
- 2018 audited annual financial statement, and four years pro-forma annual financial statements;
- 6-months management accounts to 30 June 2019;
- Internal and/or external management reports;
- A completed rating questionnaire containing additional information on Axxela Limited and its subsidiaries;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties; and
- Information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

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