GCR affirms Chellarams Plc’s Issuer and Bond Ratings at BB(NG); Outlook Negative

17 Dec 2015 In Rating Notifications

GCR affirms Chellarams Plc’s Issuer and Bond Ratings at BB(NG); Outlook Negative

Lagos, 17 December 2015—Global Credit Ratings has affirmed the long term national scale Issuer rating assigned to Chellarams Plc at BB(NG) and maintained the national scale short term rating at B(NG), with the ratings placed on Negative Outlook. Concurrently the following bond ratings have also been affirmed:

Senior Unsecured Series 1 Bond: BB(NG)  Negative Outlook
Senior Unsecured Series 2 Bond: BB(NG)  Negative Outlook

The ratings are valid until November 2016.


RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) on Chellarams Plc (“Chellarams” or “the Group”) based on the following key criteria:

Chellarams Plc is a large Nigerian conglomerate with competitive market shares across a diverse range of industries, primarily including chemical products and fast moving consumer goods (“FMCG”), underpinned by its long operational history (over 90 years) and extensive distribution network. However, operations have consistently underperformed in recent years, due to high production costs (exacerbated by rapid depreciation in Naira value) and increased competitive pressures, which have resulted in less pricing power.

The operating environment remained very challenging over the past 18 months, with the sharp decline in oil revenue having reduced government spending, as well as having a negative impact on general corporate and consumer spending. Moreover, violence has persisted in the North Eastern part of the country, which accounts for around 40% of Chellarams revenue. Thus, following 18% growth in F14, revenue fell 9% to N25.1bn in F15 and dipped further by 20% year-on-year (“YoY) to N10.7bn at 1H F16. Combined with a decrease in the gross margin to 8.3% in F15 (F14: 9.6%), gross profit fell 22% to N2.1bn.

As total operating expenses exceeded gross profit and net finance charges spiked to N917m, Chellarams incurred a substantial N2.6bn pre-tax loss in F15. Management expects earnings to improve in F16, due to the fall in raw material prices which have reduced production costs in the 6 month period to September 2015 (“1H F16”). This was evidenced somewhat at 1H F16, when the group’s operating margin rose to a high 7%, with the operating profit reported at a review period high of N752m.

The severe cash flow pressure and huge operating loss in F15 necessitated additional borrowing to finance working capital. Thus, debt has rose by N6bn to N13.4bn at FYE15 and N13.8bn at 1H F16, significantly raising the group risk profile. With equity having been impaired by the losses, net gearing reached 1,105% at FYE15 (FYE14: 162%) and 1,067% at 1H F16. Net debt to EBITDA was negative at FYE15, before registering at an improved 818% at 1H F16. Such high gearing metrics evidence substantial financial stress and suggest significant risk to investors. If earnings recover in F16, there is likely to be a moderate improvement, although earnings based gearing will remain above the level characteristic of investment grade companies.

Being senior unsecured debt, the Series 1 and Series 2 bond ratings are inherently linked to the underlying unsecured corporate rating of Chellarams. Any change in the Issuer rating will likely impact the bond ratings.

Chellarams’ ability to achieve sustainable profitability, despite the challenging operating environment, would be favourably considered and could lead to a rating upgrade. Upward rating migration would also be sensitive to a substantial reduction in gearing to levels more in line with investment grade companies. Conversely, a rating downgrade is likely in the event of sustained losses at FYE16, driven by lower demand and/or rising expenses. Of great concern is the sustained working capital pressure and the negative impact this has had in terms of raising gearing significantly.


NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Adekemi Adebambo
Senior Credit Analyst
Lagos
+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

Global Master Criteria for Rating Corporate Entities, February 2015
Chellarams rating reports 2010-2014
Glossary of terms (February 2015)


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


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; and d.) the rating is valid till November 2016.

 

Chellarams 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 rating/s has been disclosed to Chellarams Plc with no contestation of the rating.

The information received from Chellarams Plc and other reliable third parties to accord the credit rating included:
- 2015 audited annual financial statements (plus four years of comparative numbers),
- budgeted financial statements for the years 2015 to 2021,
- 6-month unaudited management accounts to September 2015,
- corporate governance and enterprise risk framework,
- industry comparative data
-a breakdown of facilities available and related counterparties.
-a completed rating questionnaire

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 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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