GCR assigns Depthwize Nigeria Limited an initial issuer rating of BBB(NG); Outlook Stable.

31 Oct 2017 In Rating Notifications

GCR assigns Depthwize Nigeria Limited an initial issuer rating of BBB(NG); Outlook Stable.

Lagos Nigeria, 31 October 2017 — Global Credit Ratings has assigned national scale issuer ratings of BBB(NG) and A3(NG) in the long term and short term respectively to Depthwize Nigeria Limited, with the outlook accorded as Stable. The ratings are valid until October 2018.

RATING RATIONALE

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

Depthwize is an oil and gas servicing company, providing drilling and other related services within Nigeria. The Company has three available rigs, though only one was operational as at September 2017. While one of the two non-operating rigs has been idled since 2015 due to low demand, the other one (named Monarch) stopped operating in May 2016 following an accident, and the ensuing litigation which was subsequently settled in July 2017. Although the rig is currently active, it is yet to be engaged for drilling due to the low demand.

The Company’s operations are concentrated on a single client, which presents substantial concentration risk. Moreover, the current contract with the client expires towards the end of 2017, and while it has been renewed on an ongoing basis, the contract has always been for relatively short durations. However, management has indicated that Depthwize is at the final stages of engaging new clients to diversify client base.

Revenue is largely driven by the number of active rigs, rig utilisation hours and the USD/Naira exchange rate. While higher drilling activities did support revenue growth recorded up to FY15, lower demand for crude oil in the global market, (as well as disturbances in the Niger Delta region) saw volumes fall and revenue decline by 9.5% in FY16 and an annualised 6.4% in 1H FY17. While the EBITDA margin has generally registered above 40%, a higher cost base (driven largely by administrative expenses) saw the margin decline to 34.5% in FY16. However, Depthwize expects economies of scale to support a sustainable margin above 50% over the medium term.

High working capital absorptions have been reported since FY14. While this has partly resulted from lease payment for rigs, of greater concern has been the N12bn increase in trade receivables between FY14 and FY16. This suggests that Depthwize’s customer has not been honouring its obligations timeously, constraining funding flexibility.

Gross debt has increased from N18.9bn at FY13 to N35.1bn at 1H FY17, driven by working capital requirements and the acquisition of new rigs. Accordingly, all credit protection metrics have deteriorated. Thus, gross debt to equity registered above 350% in all periods, and climbed to 433% at FY16 (FY15: 358%) after the net loss. Gross debt to EBITDA has risen from around 320% at FY13 to 378% at FY15, before spiking above 600% at FY16 due to low earnings. Similarly, net interest coverage fell to 0.8x (FY15: 1.8x), after declining steadily from a review period high of 2.7x in FY13. However, mitigating the financing risk somewhat, more than 50% of the gross debt relates to finance leases from Megadrill Services Limited (“Megadrill”). The balance comprises a USD100m commercial loan by a consortium led by JP Morgan (received in FY13). While Depthwize has been servicing this loan, the loan Naira value has been inflated by an exchange loss of about N9.7bn, arising from currency translation effects.

Depthwize plans to raise N20bn four-year fixed rate bonds during 4Q FY17, of which 80% of the proceeds will be utilised to refinance the existing USD denominated bank debt. Given the anticipated earnings growth, gearing metrics are projected to decline gradually, with a net ungeared position forecast by FY20. Regarding the proposed bond issuance, Megadrill, the lessor, has agreed to waive lease interest and suspend principal lease repayment from financial year 2017 to 2022, so as not to burden Depthwize with excessive debt servicing costs. It has also allowed Depthwize to offer mortgages over the rigs as security to lenders.

Reducing concentration risk by securing new clients is key to ratings progression. This should also help with attainment of earnings forecast over the medium term, which will see debt serviceability improve and a reduction in the debt profile. Conversely, earnings underperformance, combined with a significant increase in the cost base, leading to deterioration in liquidity position and other credit protection metrics could result in ratings downgrade.

NATIONAL SCALE RATINGS HISTORY

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

Last rating: n/a

ANALYTICAL CONTACTS

Primary Analyst
Femi Atere
Credit Analyst
.(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, updated February 2017
Glossary of Terms/Ratios, February 2017

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; and d.) the rating is valid till October 2018.

Depthwize 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 Depthwize Nigeria Limited with no contestation of the ratings.

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 Depthwize Nigeria Limited and other reliable third parties to accord the credit ratings included:
- 2016 audited annual financial statement, and four years audited annual financial statements;
- Unaudited management accounts to 30 June 2017;
- Financial projections for six years (2017-2022);
- Internal management reports;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- 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.

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