October 17, 2022
Major manufacturing firms sustained their businesses with bank credits amounting N535.2 billion in the first half of the year, H1’22, amidst scarcity of foreign exchange and general cashflow challenges during the period.
The amount indicates increased borrowing of about 17.9% higher than the N453.8 billion in the corresponding period of 2021, HI’21.
Financial experts say the companies may have ended up in a debt trap following the rise in interest rate as a result of a change in monetary policy by the Central Bank of Nigeria, CBN, in the second half of the year, H2’22.
Two weeks ago, the apex bank raised its monetary policy rate to 15.5 percent, the third time within three months, a development that has triggered rising lending rates across the banking and finance sector.
This development, according to financial experts, indicates that the companies that have borrowed huge in the H1’22 are now caught in a serious debt situation as cost of operating capital is now rising, a situation that will impact their profit negatively, and also restrict their ability to pay dividend.
Financial information from 15 leading manufacturing companies listed on the Nigerian Exchange Limited, NGX, shows that the finance cost (interest on borrowing) rose by a significant 35.8 per cent to N45.5 billion in H1’22 from N33.5 billion in H1’21.
The companies are, Nestle Nigeria Plc, Unilever Nigeria Plc, Cadbury Nigeria Plc, Nigerian Breweries Plc, Dangote Sugar Refinery Plc, NASCON Allied Industries Plc, Golden Guinea Breweries Plc, Champion Breweries Plc . Others include: Guinness Nigeria Plc, MCNICHOLS Consolidated Plc, BUA Foods, GSK Consumer Nigeria Plc, Honeywell Flour Mills Plc, P Z Cussons Nigeria Plc, International Breweries and Nigeria Flour Mills Plc.
Analysts and investment experts have decried the high cost of borrowing from the banks, saying that capital market remains the best financing option for manufacturers to run on long term funds.
They advised manufacturing companies to consider commercial papers for short term in order to reduce finance cost and avoid banks’ stringent conditions.
Top 5 borrowers
NASCON Allied Industries led the borrowing chart in relative terms rising by 4171.8 per cent to N 1.7 billion in H1’22 from N39 million in H1’21. It was followed by GSK Nigeria whose borrowing went up by 214.6 per cent to N 22.174 billion from N 7.0 billion.
Nigerian Breweries occupied the third position rising by 199.1 per cent to N 81.9 billion from N 27.4 billion in H1’21. It was followed by Cadbury Nigeria occupying the fourth position as its borrowings rose by 58.3 per cent to N 6.1 billion from N 3.9 billion while Unilever Nigeria followed as its borrowings surged by 46.3 per cent to N 10.4 billion as against N 7.0 billion.
Analysts’ insight
Commenting on the borrowings by manufacturing companies, an investment expert and CEO, Wyoming Capital and Partners, Tajudeen Olayinka, said: “Companies can borrow to improve production capacity and reduce average cost. Where this is the case, such borrowing is considered positive, and could improve fortunes of shareholders of the company. Where such borrowing does not improve production efficiency, it can become negative to the value of the company and make shareholders worse off. This is what most companies try to consider before borrowing from short-term money market or long-term capital market.”
On the benefits of borrowing by manufacturing companies, he said: “Borrowing that improves operational efficiency would naturally benefit customers and other stakeholders. Borrowing must be done to improve shareholders wealth; and customers must have been given thoughtful consideration before embarking on such borrowing.”
However, he lamented that, “Short-term borrowing from banks could be more expensive at this time, especially if we consider the effect of rising inflation and interest rate hike by Monetary Policy Committee of CBN, which has compelled many banks to reprice loans and other financial instruments, leading to higher borrowing costs for firms and public companies. Borrowing from banks could be more problematic at this time.
Regardless of cost implications to public companies, short-term borrowings from banks might have been provided as bridging facilities for more flexible long-term capital already arranged by those companies, or as a way of obtaining working capital. It could also be a sign of weakness in annexing suppliers credit by some of those companies.”
On whether the government can aid manufacturers, Adeyinka said: “That could be another way of asking government to provide financial subsidy, when they are already enmeshed in fiscal crisis. I think the best way is to allow market to function, so that assets are properly priced in the long-term interest of the economy.”
In his own view, analyst and Vice Executive Chairman, HighCap Securities Limited, David Adonri, said: “It is common for manufacturing companies to borrow for working capital finance. “Rising cost of raw materials and expenses, in an inflationary environment, underscores the necessity for additional working capital which internal funding cannot provide.
“Increasing demand for manufactured goods due to consumer pull is another factor that may propel the need for additional working capital finance.
“Well established manufacturers can also source working capital or short term funds from the investing public by issuing commercial papers (CPs). More manufacturers are adopting this mode of finance to escape the stringent conditions attached to bank credits. Additionally, CPs provide higher volume of funds at much lower interest rates.
“The increase in short term borrowing by manufacturers when compared to last year can be attributed to increase in economic activities post Covid19 and rising cost of manufacturing inputs and distribution expenses.
“Debt finance is a last option for an enterprise. It comes with a lot of risks that can cripple an enterprise if repayment becomes difficult. The danger of debt finance is accentuated by rising interest rate and weakening demand environment now prevalent in the Nigerian economy.
“The rising interest expenses which surpass the increase in borrowing is capable of seriously eroding the profit of manufacturers and may hence depress distribution to shareholders. It is a warning signal that investors may not enjoy higher dividends this year. The implication of rising interest expenses is increase in price of goods. This erodes the purchasing power of consumers.
“It is practically impossible for a manufacturing company to be self sufficient in working capital finance. Hence, they secure supplier and bank credits from time to time to overcome their short term capital deficit. However, bank credit comes with a cost that can be dangerous if things go wrong. While bank credit supplies the much needed short term life line, its low retention in the business because both principal and interest must be repaid at intervals, can increase the financial pressure on operations. Any business disruption can cause default in repayment and possible foreclosure by the bank.
Therefore, the increasing use of bank credit by manufacturers can become harmful to both debtor and creditor if macroeconomic conditions continue to deteriorate in Nigeria.”
On government intervention, Adonri, said: “The administrative intervention of government in the credit market through CBN has not been very effective. It continues to distort the market mechanism that ought to efficiently allocate credit in the economy. The interventions have also not been appropriately directed to the foundational sectors of the economy.
Fiscal intervention can be by way of subsidy to manufacturers to enhance production while monetary policy should target low interest rate environment. If manufacturing inputs can be internalized through appropriate fiscal measures, then manufacturing cost can reduce to the point where finance cost will become negligible.”
Commenting as well, analysts and Head of Research and Investment at Fidelity Securities Limited, Victor Chiazor, said: “For the 2022 financial year, any manufacturing and consumer goods company listed on the Nigerian Exchange that is exposed to short term debt financing from the banks will be negatively impacted by the rise in interest rate. Companies that may not be impacted significantly are those who were fortunate and fast enough to have raised commercial paper and long term bonds from the capital markets at a fixed rate and tenor, which enables them properly plan their operations. For companies with bank borrowing which most times are benchmarked with the CBN MPR rate, we expect a higher interest expense line for this period which will lower the companies profit margins.
If the high interest rate regime lasts longer than necessary we may also see these companies transfer their rising expenses to the final consumer.”
On government rendering support to the manufacturing sector, he said: “The government may not be able to assist every sector, except for a few companies who have benefited from CBN intervention funds and single digit interest rate borrowing, most are exposed to more of bank borrowing which will be highly toxic to business operations if interest rates remain elevated.”
