Blue Chip Companies Return to Debt Market for Capital Raise
Some Blue chip companies are returning to debt market for capital raise, the development that has been attributed to declining yields on debt instruments in the fixed income market.
As a result, many bellwether companies are replacing expensive loans on their capital structures with a cheap funding classes.
The pattern of disclosures among big companies with strong credit rating indicates that it is more likely to see more companies coming for debt raise before year end and early 2021.
Currently, Nigerian Breweries Plc is raising ₦20 billion commercial paper under its ₦100 billion CP program.
This week, MTN Nigeria indicated plan to visit the market for a round of debt capital raise, just like Flour Mills of Nigeria revealed the same at earnings call with analysts.
In recent time, yields at fixed income market have plunged significantly, causing investors to increase position in the equities market.
Recalled that the Nigerian Treasury Bills (T-Bills) auction conducted by the Central Bank of Nigeria (CBN) on Wednesday recorded significant oversubscription with unsuccessful bids reported at ₦667.1 billion due to robust financial system liquidity amidst limited investment options.
Stop rates at the auction settled at 0.34%, 0.5% for the 91-day, & 182-day maturities, and 0.98% for the 364 day instruments.
CSL Stockbrokers said the CBN’s policy which has prevented non-banking corporates from accessing the open market operations (OMO) window has limited fixed income options for them to Nigerian Treasury Bills (NTB), fixed deposits, Eurobonds and FGN bonds.
This has led to a surge in demand for NTB which has exerted downward pressure on rates in primary and secondary markets.
For example, stop rate for the 364-day bill at the bi-weekly primary market auctions (PMAs) has slumped to less than 1% from about 11.5% less than a year ago when the policy was announced .
Noting the development, analysts told MarketForces Africa that a lot of companies with strong credit rating would use the opportunity to reduce their finance costs.
Sustained decline in yields would means more and more companies would prefer debt market raise to obtaining loans from deposit money banks.
Due to Flour Mills of Nigeria’s capital structure, finance costs increased by 18.8% to ₦5.09 billion in Q2-2021, as total borrowings rose by 13.8%.
Meanwhile, from the beginning of the financial year to date, its finance cost has expanded 19.3%.
In the next few weeks, the management said Flour Mills will be in the market to raise ₦30 billion fixed rate bond.
The fund, according to the management, will be partly utilised to refinance some existing debts at currently low interest rates and support working capital.
“We believe this will underpin profitability, as interest expense growth should slow down”, Chapel Hill Denham said.
Nigerian Breweries:
Nigerian Breweries Plc is in the market to raise ₦20 billion commercial paper under its ₦100 billion CP programme to supporting working capital needs.
In 2020, the leading brewer has been the most active in debt capital market, says analysts at Chapel Hill Denham.
After successful completion of the commercial paper issuance, NB’s debt finance in the capital structure is expected to hit 48%.
Chapel Hill Denham in a note said this is the company’s third CP issuance in 2020, after raising ₦53.83 billion in February 2020 against target raise of ₦45 billion.
The sum was raised via a 181-day series 5 issue worth ₦1.07 billion and 268-day tenor Series 6 issue amounted to ₦52.76 billion.
These were priced at a yield of 4.999% (discount rate – 4.878%) and 7.4969% (discount rate – 7.1068%, and 181-day tenor) respectively.
NB also raised a cumulative ₦37.36 billion in April 2020, split across 182-day tenor Series 7 worth ₦13.03 billion and 268-day series 8 amounted to ₦24.33 billion.
Analysts said the 182-day tenor was priced at a yield of 6.0% (discount rate – 5.8262%), while the 268-day tenor was priced at a yield of 7.0% (discount rate – 6.6587%).
“We believe this new offer will be channeled toward supporting working capital”, says Chapel Hill Denham.
However, analysts do not rule out the possibility of management channeling the proceeds toward partly refinancing a maturing series-6 CP worth ₦52.76 billion, anticipated to mature on 6 November 2020.
NB Plc new offer is split across three tenors: 120-day (discount rate: 2.7745%, yield: 2.80%), 183-day (discount rate: 2.9556%, yield: 3.00%), and 240-day (discount rate: 3.1341%, yield: 3.20%).
“We note that the implied yields on the offerings are 231 basis points (bps), 242bps and 254bps above the estimated yields on NTBs with similar tenors”, analysts stated.
Chapel Hill Denham said, ‘Given the robust liquidity backdrop, the debt market in Nigeria is currently sellers’ market, so we anticipate a successful issuance’.
“As at June 2020, NB Plc was the most geared, with debt/equity ratio of 86.6% against 18.7% and 70.9% for Guinness and International Breweries respectively”, Chapel Hill Denham explained.
MTN Nigeria
Despite strong borrowings position, MTN Nigeria that has been Rated A1+ and Aa by GCR and Agusto & Co. respectively has also disclosed plan to visit debt market in the fourth quarter of 2020.
Management disclosed plans, during the conference call, to approach the debt capital market in Q4-20.
Reacting to the plan, analysts at Chapel Hill Denham said they see significant headroom for the company in this regard considering its net debt-to-EBITDA ratio of 0.41x (excluding lease liabilities).
“If we capture the lease liabilities, the net debt-to-EBITDA ratio of 1.71x still compares favourably with Airtel Africa’s 2.2x as at the same period (September 2020).
Importantly, Chapel Hill Denham said the low interest rate environment in Nigeria indicates that MTNN’s borrowing costs will trend downwards for improved earnings in the coming quarters.
It said this could trigger an upgrade of consensus earnings per share for financial year 2020.
MTNN currently has a total of ₦100 billion commercial paper in issue with more compelling yields as against the yields on corresponding Government securities.
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Blue Chip Companies Return to Debt Market for Capital Raise
