GCR downgrades Lafarge Africa Plc’s rating to A+(NG); Outlook Stable

01 Nov 2016 In Rating Notifications

GCR downgrades Lafarge Africa Plc’s rating to A+(NG); Outlook Stable

Lagos, 31 October 2016—Global Credit Ratings has downgraded the national scale Issuer ratings assigned to Lafarge Africa Plc to A+(NG) and A1(NG) in the long term and short term respectively; with the outlook accorded as stable.In alignment with Lafarge Africa Plc’s long term rating, GCR has accorded final ratings of A+(NG) to both of the Series 1 Bonds and Series 2 Bonds; with Stable outlooks. The ratings expire in August 2017.

RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) on Lafarge Africa Plc’s (“LAP” or “Issuer” or “the Group)” and the Series 1 and Series 2 Bonds based on the following key criteria:

Lafarge Africa Plc’s strong domestic market position is underpinned by an established international brand, effective distribution network and operational support from parent, LafargeHolcim. Following the global merger of Lafarge S.A and Holcim in 2015, the local companies have been fully integrated, while the established South Africa operations notably enhanced its geographic footprint. Nigeria remains the major area of operations and accounts for over 70% and 90% of revenue and EBITDA respectively. The anticipated commissioning of the additional 2.5Mtpa capacity in 4Q F16 bodes positively for earnings over the medium term. Installed cement capacity is anticipated to reach 14.6mtpa by end-2016, in addition to strong market leading positions in aggregates, ready mix concrete and fly ash.

While revenue showed some resilience in F15, rising by 3% to N267.2bn, a pronounced 29% YoY decline to N107.4bn was reported in the six months to 30 June 2016 (“1H F16”). This came on the back of gas-shortage driven disruptions in production, which compounded the effect of low market prices. The pricing pressures, amidst rising production costs,  saw LAP’s gross margin more than halved to 14.1% in 1H F16 (F15: 35.6%), while the operating margin registered at just 2.7% (F15: 19.3%). As a result, operating profit fall by 93% YoY to N2.9bn.

While cement prices have risen by up to 40% since end-August 2016, and despite firmer domestic earnings typically reported in the second half, F16 operating profit will register well below historical levels. A 45% devaluation of the Naira drove a N28.8bn unrealised exchange loss at 1H F16, which inflated the pre-tax loss to N30.2bn. Looking ahead, revenue is expected to grow strongly with the commissioning of a new 2.5mtpa line at Mfamosing and higher productivity across the plants. If successfully bedded down, this will alleviate earnings variability through economic cycles.

Consolidation of United Cement Company of Nigeria Limited (“UniCem”) raised total debt from just N28.3bn at FYE13 to N148.3bn at FYE15. In June 2016, LAP acquired the remaining 50% equity in UniCem. Following the acquisition, net foreign currency loans held by LAP increased to USD594m (USD509m shareholder loans and USD85m external loans). Thus, from a net ungeared position at FYE13, net gearing peaked at 121% at 1H F16 (FYE15: 76%), while the significant deterioration in earnings drove annualised net debt to EBITDA to 783% (FYE15: 194%). Per management, the USD debt has been restructured, with USD493m (of the USD509m) in shareholder loans converted into a quasi-equity instrument, on which an average interest rate of 6% is payable at LAP’s discretion. The restructuring reduced group debt to N133.3bn by end-September 2016 (“3Q F16”) and net gearing to 58%. However, annualised net debt to EBITDA rose further to 846%, due to sustained earnings drag.

GCR has noted the Group’s partial refinancing of UniCem’s naira and USD denominated bank loans from the Series 1 and Series 2 Bond proceeds of N58.9bn, and planned restructuring of USD85m external loans before FYE16. These changes notwithstanding, LAP’s credit risk profile has weakened perceptibly, a position further informed by the deterioration in debt service metrics. Net interest cover was negative at 3Q F16, while operating cash flow covered only 58% of short term debt. Accordingly, the remedial action is not considered sufficient to alleviate pressure on the ratings. GCR has, however, taken cognisance of further initiatives taken to support a recovery in earnings, and will continue to monitor progress going forward.

In March 2016, Lafarge Africa Plc secured approval from Securities and Exchange Commission to issue bonds into the Nigerian capital market, under a N100bn bond issuance programme. In June 2016, LAP successfully raised an initial N60bn in two tranches; Series 1 Bonds with a principal of N26.4bn and Series 2 Bonds with a principal of N33.6bn. The bonds were favorably priced at fixed interest rates of 14.25% and 14.75% respectively. As the Series 1 Bonds and Series 2 Bonds are direct, unconditional, senior and unsecured obligations of the Lafarge Africa Plc, the Bonds bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bonds ratings.

Upward rating migration in the medium term is dependent on the successful completion of ongoing projects, significant growth in profitability and improvement in earnings based gearing metrics. Conversely, slower than anticipated economic growth (causing delays in rolling out public infrastructure projects), security challenges and erratic gas supply could adversely affect earnings and result in further deterioration in gearing and credit protection metrics. These factors could place downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY
Initial rating (July 2010)
Issuer long term: A(NG);
Issuer short term: A1(NG);
Outlook: Stable

Last rating (April 2016)
Issuer long term AA-(NG);
Issuer short term: A1+(NG);
Outlook: Stable
Series 1 Bond long term: AA-(NG); Outlook: Stable
Series 2 Bond long term: AA-(NG); Outlook: Stable

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
Criteria for Rating Corporate Entities, updated February 2016
Lafarge Africa Plc Rating Reports, 2010 to 2015
Indicative bond rating report, April 2016
Glossary of terms/ratios, February 2016

SALIENT FEATURES

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 Issuer and Bonds ratings expire in August 2017.

Lafarge Africa 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 have been disclosed to Lafarge Africa Plc with no contestation of the rating.

The information received from Lafarge Africa Plc and other reliable third parties to accord the credit rating included:
- the 2015 audited annual financial statements (plus four years of comparative numbers),
- interim six months’ and nine months’ accounts to June 2016 and September 2016 respectively
- budgeted financial statements for the years 2016 to 2020,
- a completed rating questionnaire containing information on Lafarge Africa Plc,
- in respect of the Bond programme: the final Programme Trust Deed, final Series 1 Trust Deed, final Series 2 Trust Deed, final Shelf Prospectus, final Series 1 Supplementary Shelf Prospectus, final Series 2 Supplementary Shelf Prospectus.

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.


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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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