Fitch Ratings has assigned Dangote Industries Limited's (DIL) senior unsecured notes - issued by DIL's SPV, Dangote Industries Funding Plc - a final National Rating of 'AA(nga)'.

Fitch has also affirmed DIL's National Long-Term Rating of 'AA(nga)' with Stable Outlook.

The notes are issued under DIL's existing national bond programme of NGN300 billion, comprising tranche A and B amounting to NGN10.47 billion and NGN177.12 billion with seven- and 10-year maturities, respectively. The tranches were issued on the Nigerian local bond market with semi-annual coupons of 12.75% (A) and 13.5% (B).

The bonds' final terms are in line with Fitch's base-case assumptions. The proceeds are being used to part-finance the completion of DIL's refinery and petrochemical plants. Dangote Oil Refining Company Limited (DORC) and Dangote Fertiliser Limited (DFL), DIL's subsidiaries, are co-obligors under the bond programme.

DIL is a diversified conglomerate in Nigeria with a leading share in the cement business and a future key operator in the petrochemical industry through its fertiliser and oil refinery business. Its strategy is to gradually establish a downstream industry in Nigeria and be the largest urea producer in Nigeria. It also aims to make Nigeria a net exporter of refined petroleum products and petrochemicals by 2026.

Key Rating Drivers

National Scale Rating: DIL is rated on Fitch's Nigerian National Rating scale. Its business model, profitability and leverage metrics are commensurate with an 'AA(nga)' rating category. DIL generates a majority of its revenue from the domestic market and borrows in both Nigerian naira from local banks and in US dollars from international markets.

Prior-Ranking Debt: DIL has significant secured debt we view as prior-ranking to its newly issued unsecured bonds. The bonds include the standard covenant package for local bond issuance. Their documentation includes negative -ledge and cross-default provisions. Fitch's expectations of recovery result in a Recovery Rating of 'RR4' and bond ratings that are at the same level as DIL's National Long-Term Rating.

Cement a Major EBITDA Contributor: Dangote Cement (DCP) is a significant contributor to DIL's consolidated profile. The company is supported by large-scale operations in Nigeria and pan-Africa. In 2020, DCP's EBITDA contribution to DIL stood at 93%, which we forecast to remain high until 2022 when contributions from the fertiliser business increase.

Strong Cement Growth: The cement business recorded significant recovery in sales volume due to increases in prices and demand across DCP's main markets. Revenues rose 34% yoy in 2021 on growth in Nigeria and pan-Africa, despite volatility in landing cost of cement and clinker. EBITDA in 2021 increased 9% to USD1 billion (24% in local currency). Additionally, the company's export strategy is expected to ramp up, which could lead to sizeable volume sales.

Lower Urea Output: DIL's urea plant was commissioned in 2021 following delays, with a 25% utilisation rate of line 1 in 2021 and 0% in line 2. Both lines were fully operational as of May 2022. Gas compressor issues and, as a result, low pressure of gas supplied to the plant were the main factors behind the delay, along with a delay in obtaining regulatory approvals. Gas pressure has recovered in 2022, and management have conservatively assumed utilisation rates for the respective lines to increase to 55% and 50% in 2022, 65% in 2023 and 82% by 2025.

Moderate Refinery Execution Risk: DIL's refinery project is on track to be completed by 2023, and requires an additional USD1.1 billion capex in 2022 to be partly funded by the newly issued bonds. Considering the importance of the refinery's cash flow contribution to the company's deleveraging capacity, the timely completion of the project is a key driver of our rating, and only limited delays or cost overruns may be tolerated within the current rating.

Refinery to Benefit Operational Profile: The refinery project is expected to sustain strong margins and yield solid cash generation, adding diversification to DIL's profile and allowing rapid deleveraging. Once operational, we expect this project to contribute around USD1 billion to EBITDA annually when ramped up from 2024.

Limited Financial Flexibility: Should refinery completion costs overrun or market conditions in the cement or urea sector deteriorate materially, we do not believe that DIL's existing creditors would have further lending capacity. We believe that further asset sales, either in cement, or stakes in the projects, would be the more likely options to fund the refinery.

High Leverage: We estimate funds from operations (FFO) gross leverage to have been high for 2021 at above 7x, up from 4.7x in 2019, due to continuing capex for the refinery plant. We expect DIL to start deleveraging meaningfully from 2023.

Weak Corporate Governance: DIL has a complex group structure with a large amount of related-party transactions, with a negative effect on operational and financial transparency. The group structure is further complicated by the Nigerian National Petroleum Corporation's 20% stake in the refinery project. We also view the dominance of Aliko Dangote, as CEO and the main shareholder, in operations as an additional risk.

Parent Subsidiary Linkage: Greenview International Corp (Greenview) has majority ownership in DIL. We view the legal incentives as high based on parental guarantees. Strategic incentives are also high as DIL contributes all EBITDA generation. The operational incentive is moderate. As a result, we do not notch DIL's rating from our credit assessment of Greenview.

Derivation Summary

DIL is a diversified conglomerate with a leading market share in building materials in Nigeria and, potentially, a large operator in the fertiliser and oil refinery markets in Nigeria and regionally. We apply the generic navigator in our analysis of DIL's consolidated profile. We also compared its business profile with its sector peers'.

Diversified peers in LATAM, Votorantim SA (VSA, BBB-/Stable) and Alfa SAB de CV (Alfa, BBB-/Stable), have geographical and product diversification across industries such as building materials/cement, petrochemicals, and in the case of VSA, oil & gas and mining. DIL's business profile of 'bb' is weaker than VSA's and Alfa's, due to the peers' meaningful diversification in LATAM and stable cash flow generation from fast-moving capital goods, compared with high exposure to cyclical commodity prices for DIL's cement.

Key Assumptions

Cement business to average USD1.1 billion p.a. in EBITDA contribution in 2022-2025

Urea plant line 1 to gradually ramp up to an average 60% capacity utilisation in 2022-2023 and to around 80% by 2025, from 25% in 2021. Line 2 to start production in April 2022 to around 80% capacity rate by 2025 from 50% in 2022

Fitch urea price deck assumptions: FOB Black Sea USD500/tonne in 2022; USD300/tonne in 2023; and USD250/tonne in 2024-2025

Urea plant's 66% EBITDA margin in 2022-2025, increasing consolidated EBITDA margin to 39% in 2022 from 37% in 2021

Oil refinery to start production in 2H23. Fitch conservatively assumes a six-month delay in production ramp-up versus management expectations, with an average gross refining margin of USD10/barrel

Capex at USD1.38 billion in 2022

No dividend payments until 2024 when net consolidated leverage is below 1.5x. Dividend pay-out to equal 90% of net income in 2024

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on Nigeria's sovereign IDR (B/Stable) and improvement of DIL's operational and financial profiles, leading to gross debt/ EBITDA below 4.0x

Start of commercial production at the refinery project

Sustained positive free cash flow (FCF) generation

Sufficient liquidity with sustained liquidity score above 1x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Sustained deterioration in operating performance across DIL's businesses, leading to gross debt/ EBITDA consistently above 5x

Weak liquidity position

Delayed commissioning of the refinery project by more than a year and significant capex overrun

Sustained negative FCF generation after commissioning of the refinery

Liquidity and Debt Structure

Adequate Liquidity: We estimate DIL's liquidity score at an adequate 1.5x for 2021 with estimated total external group debt of USD3.8 billion. It has no significant maturities until 2023 when Fitch expects the refinery to start generating cash flow. We expect positive FCF from 2023 when both the refinery and fertiliser projects are ramped up and capex is moderate.

ESG CONSIDERATIONS

DIL has an ESG Relevance Score of '4' for group structure due to complex group structure, limited transparency, and significant related-party transactions. It also scores '4' for governance structure due to a lack of board independence and key person risk from the dominant shareholder Mr. Dangote.

DIL has scores of '4' for waste, hazardous materials management, ecological impact and for human rights, community relations, access and affordability, due to exposure to water and waste management in Nigeria and to land rights/conflict zone in the Nigerian Delta area and its communities.

All the above-mentioned factors have a negative impact on DIL's credit profile and are relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2022 Electronic News Publishing, source ENP Newswire