GCR Downgrades Chellarams Plc’s Issuer and Bond Ratings to BB(NG); Outlook Stable

22 Dec 2014 In Rating Notifications

GCR Downgrades Chellarams Plc’s Issuer and Bond Ratings to BB(NG); Outlook Stable

Lagos, 22 December 2014—Global Credit Ratings has downgraded the long term national scale Issuer rating assigned to Chellarams Plc to BB(NG) and maintained the national scale short term rating at B(NG). Concurrently the following bond ratings have also been downgraded:

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

The ratings have been placed on Stable Outlook and are valid until 11/2015.


RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) on Chellarams Plc (“Chellarams” or “the Group” or “the Company”) 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 and extensive distribution network.

However, operations have consistently underperformed in recent years, due to high production costs and increased competitive pressures, which have resulted in reduced pricing power.

Earnings margins deteriorated in F14 and 1H F15, with the gross margin declining to 10.5% and 7.8% respectively, and negligible or negative operating margins. This led to a net loss before tax of N68.6m in F14 and an operating loss of N242m at 1H F15. Accordingly, the Group was unable to meet its interest obligations from operating cash flows. Although revenue is expected to improve in 2H F15, a further loss for the full year is likely.

The weaker earnings necessitated additional borrowing to finance working capital. Thus debt rose by around N1bn to N7.5bn at FYE14 and further to N9.9bn at 1H F15. As a result, net gearing increased to 163% at FYE14 (FYE13: 141%) and 239% at 1H F15. Of greater significance, the much weaker earnings saw gross and net debt to EBITDA deteriorated to around 1,500% at FYE14. If earnings recover in F15, there is likely to be a moderate improvement, although earnings based gearing will remain above the level characteristic of investment grade companies.

Notwithstanding strong GDP growth, the Nigerian environment remains very challenging, with Chellarams’ impacted by weak demand, violence in the northern part of Nigeria and rising operating costs. In particular, the sharp fall in oil prices and devaluation of the Naira is likely to reduce demand and raise costs in 2015. To reflect the challenging environment and the sustained margin pressure, Chellarams further revised its forecasts downwards. Nevertheless, performance for 1H F15 suggest that even these earnings targets will not be met, while gross debt will be much higher than expected, increasing the overall risk profile.

Being senior unsecured debt, the Series 1 and Series 2 bond ratings are intrinsically 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 positively 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 significant losses at FYE15, driven by lower demand and/or rising expenses. Of particular concern is the sustained working capital pressure and the negative impact this has had in terms of raising gearing significantly.


NATIONAL SCALE RATINGS HISTORY
Initial rating (Aug/2010)
Long term: BBB-(NG); Short term: A3(NG);
Outlook: Stable

Last rating (Dec/2013)
Long term: BB+(NG); Short term: B(NG);
Senior Unsecured Series 1 Bond: BB+(NG)
Senior Unsecured Series 2 Bond: BB+(NG)
Outlook: Stable


ANALYTICAL CONTACTS
Primary Analyst
Adekemi Adebambo
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, August 2014
Glossary of terms (February 2014)


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 ratings expire in November 2015.

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 the latest available audited annual financial statements (plus four years of comparative numbers), budgeted financial statements for the years 2015 to 2020, internal and/or external management reports, 6-month unaudited management accounts to September 2014, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, 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 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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