GCR affirms Viathan Funding PLC’s National Scale Rating of BBB-(NG); Rating Watch

06 Sep 2019 In Rating Notifications

GCR affirms Viathan Funding PLC’s National Scale Rating of BBB-(NG); Rating Watch

Lagos, 06 September 2019—Global Credit Ratings has affirmed the long term and short term national scale Issuer ratings assigned to Viathan Funding PLC of BBB-(NG) and A3(NG) respectively,  with the Outlook placed on ‘Rating Watch’. The ratings are valid until October 2019.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Viathan Funding PLC (“VFP” or the “Group”) based on the following key criteria:

Viathan Funding PLC is a special purpose vehicle, incorporated to raise funds from the debt capital market.  Twelve entities under the funding arrangement own and manage power generation, distribution and gas supply facilities. Having increased power generation capacity to 53.3Megawatts (FY17: 42.5Megawatts), the Group has built up important mass and is now focusing on capacity optimisation to drive earnings generation and support cash flows. The entities leverage extensive technical expertise, linkages with well-established international partners, and off-take agreements with State-owned entities and various commercial entities.

Regulatory risk within the industry has heightened on account of new Federal Government policy directives to promote a competitive electricity market. In respect of an Eligible Customer directive, the Group has ongoing disputes involving a regulator and Eko Electricity Distribution Company Plc, which followed an allegation of encroachment on electricity distribution network and distribution infrastructure. While Viathan is seeking legal resolution of the matters, an adverse outcome may impact its credit risk profile.

Increased capacity and uptake by clients has supported revenue growth through most of the review period. While VFP increased revenue by 13.5% to N8bn in FY18, this significantly underperformed the budget by 40% due to delay in completing some planned projects, which constrained ability to utilise capacity and supply off-takers. Based on this, management has revised its projections, with a revenue target of N11.9bn by FY19 to be supported by improved capacity utilisation and latent demand within the industry.

 

Margins remain under pressure given the high production costs which has accounted for over two-thirds of revenue, thus resulting in a low operating profit. After accounting for a higher net finance charge arising from debt facilities, as well as an exchange loss related to derivative assets, profitability was completely eroded in FY18, representing a third consecutive net loss.

Despite the sizeable net finance charge, the Group generated a positive operating cash flow, supported by a substantial working capital release (mainly from an increase in trade credit and the realisation of a large portion of receivables). Nevertheless, managing debtors remains challenging in the market, and could have a negative rating impact if a deterioration is noted.

Viathan has increased debt significantly over the review period to fund its capex. While most debt is long term the minimal equity and earnings underperformance have resulted in weak credit protection metrics. Thus, net debt to EBITDA was high at 1,863% at FY18. While cognisance is taken that 60% of the debt is from related party convertible loans, GCR does not consider the current funding structure to be sustainable.

According to management, the process for converting Synergy’s shareholder loan has been initiated, and is expected to be finalised before 3Q FY19. This would see gross debt decline to N11.8bn by FY19, with net debt to EBITDA around 350%. Nevertheless, the debt burden remains high and the Group will be exposed to significant refinancing risk should the loan not be converted.

The accorded ratings hinge on the planned conversion of the shareholder loan to equity before end-September 2019. The ‘Rating Watch’ reflects potential negative action that will follow in the event of non-conversion.  GCR will reassess the ratings in October 2019.

Positive rating action is reliant on the timely ramp-up in capacity, attainment of targets, and the Group’s ability to mitigate refinancing risk. Conversely, the Group’s inability to conclude the planned conversion, materially adverse regulatory developments, and further losses with impact on credit protection metrics would result in a rating downgrade.


NATIONAL SCALE RATINGS HISTORY

Initial rating (July 2017)
Long-term: BBB-(NG)
Short-term: A3(NG)
Rating outlook:  Stable


Last rating (September 2018)
Long-term: BBB-(NG)
Short-term: A3(NG)
Rating outlook:  Stable


ANALYTICAL CONTACTS


Primary Analyst
Femi Atere
Analyst
.(JavaScript must be enabled to view this email address)
Lagos
+23 41 9049462


Committee Chairperson
Dave King
Chairman

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2018
VFP Issuer rating reports (2017-18)
Glossary of Terms/Ratios (February 2018)


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 process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings expire in October 2019.

Viathan Funding 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 Viathan Funding PLC.

The information received from Viathan Funding PLC to accord the credit rating included;
• 2018 audited annual financial statements for six entities (plus four years of comparative numbers),
• 2019 forecast
• industry comparative data and regulatory framework
• a breakdown of facilities available and related counterparties.
• information specific to the rated entity and/or industry was also received.

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/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.

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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