By Jude Fejokwu

The $420 million Dangote Cement plant in Zambia: the company has borrowed heavily

About eight years ago, equity public offers was the popular way to raise capital when needed. Some companies even came to the market twice within a fifteen-month frame. No company thought of raising debt; stock prices were at all-time highs which made it easier for companies to raise desired sums without piling up on shares outstanding. Besides, who wants to raise capital that has to be fully repaid with interest and the company has to try to generate income from utilization of debt in excess of interest due plus principal repayment?

When companies raise equity, shareholders recourse is to sell their stake on the exchange for whatever the market says the company is worth and move on. In other words, the management of companies do not have to pay back equity shareholders directly. Once they get the equity, it belongs to the companies to pretty much do as they please. The equity capital raising party continued until equity prices tumbled in 2008 and 2009. Companies (especially Nigerian banks) saw their share prices no longer trading at appealing prices. The other source of capital that companies (including banks) dreaded, pretty much became their only option.

The companies had not fully understood the differences in how equity and debt capital are to be deployed for maximum returns. This has led to debt becoming a burden to many companies instead of an asset. Companies start working for debt holders instead of shareholders. Shareholders who are pretty much out in the wilderness if a company ceases to be a going concern, also find themselves getting the short end of the stick even when the company is still a going concern. Debt starts holding companies back instead of propelling them forward as too much is taken on within a short period and is deployed into wrong scenarios for debt capital. Find below a list of major, visible Nigerian companies and their most recent debt state of affairs. I also brought into the mix two banks in Malawi and Ghana who are also experiencing high borrowing rates. Did these other banks rein it in or go on a borrowing spree also? (Equity attributable to shareholders was used where applicable.)

Dangote Cement: The company’s debt/equity is at 51% as at June 30th, 2015. Times interest earned is 4.5X as at same time. This is a bit over the top in terms of debt. Threshold for debt-equity by me is 43%.

UACN: The company’s debt/equity is at 73% as at June 30th, 2015. Times interest earned is at 1.6X. This is a dire situation in my opinion. Their H1 earnings shared my view.

Forte Oil: The company’s debt/equity is at 327% as at June 30th, 2015. Debt is 3.27X equity. Times interest earned is 1.2X. This is another dire situation in my opinion. Their H1 earnings also shared my view to a certain extent.

a FORTE OIL station: the company has a debt/equity ratio of 327%

Nestle: The company’s debt/equity is at 141% as at June 30th, 2015. Times interest earned is 4.2X. The company is also heavily debt burdened with debt on its books exceeding equity. Its interest cover is commendable given the burden on its books.

Seven-Up: The company’s debt/equity is at 77% as at June 30th, 2015. Times interest earned is 4.2X. Another debt burdened company; the bottom has not fallen out. Its cover is decent.

Seplat: The company’s debt/equity is at 72% as at June 30th, 2015. Times interest earned is 1.76X. This is another dire situation in my opinion. Their H1 earnings shared my view.

Flour Mills: The company’s debt/equity is at 223% as at March 31st, 2015. Debt is 2.23X equity. Times interest earned is 0.55X. This is the worst situation of all. This is what happens when a company gets into too many businesses all at once and is heavily exposed to currency and externality risks…

Transcorp: The company’s debt/equity is at 94% as at June 30th, 2015. Times interest earned is 2.5X. This company is overly debt burdened. The H1 earnings shared my view.

Guinness: The company’s debt/equity is at 84% as at March 31st, 2015. Times interest earned is 2.9X. This is another overly debt burdened company that has been held in bondage due to debt burden. Its new business initiatives have not yet fully reflected on the income statement due to the company’s debt burden which in a way has shackled the company. Now for the banks.

First Bank: The bank’s debt/equity was at 52% as at June 30th, 2015. This is a bit over the top; about 900 basis points away from safety. I created a formula to assess how well banks are putting their debt capital to use. On a relative basis, First Bank is utilizing its debt slightly better than Diamond and much better than FCMB. On an absolute basis, First Bank is not putting its debt capital to good enough use. Still managed to eke out an increase in profit.

Diamond Bank: The bank’s debt/equity was at 50% as at June 30th, 2015. This is also a bit over the top; about 700 basis points away from safety. The bank experienced a decline in profit.

FCMB: The bank’s debt/equity was at 85% as at June 30th, 2015. This is a dire situation especially for a bank. The company’s debt is pretty much double where it should be at current equity levels. An equity capital injection will likely not be enough to bring the bank to a level of safety. The holding company structure could not prevent (unlike First Bank) a decline in profit year-on-year.

Now, let us take a look at two Malawian & Ghanaian banks.

National Bank of Malawi: The bank’s debt/equity was at 13% as at December 31st, 2014. The bank borrowed minimally, taking into cognizance the high borrowing rates and volatile currency. RoE was 33% for fiscal year 2014 and the bank utilized the limited debt it took on very well.

NBS Bank Malawi: The bank’s debt/equity was 46% as at December 31st, 2014. This is slightly above safety levels. The bank was able to generate RoE of 23% (which is higher than every Nigerian Bank except for GT Bank & Stanbic IBTC.) The bank was still able to put its excess debt to good use and better than every Nigerian bank in 2014 despite also operating under adverse circumstances including expensive borrowing rates and a volatile currency.

Ecobank Ghana: The bank’s debt/equity was 28% as at December 31st, 2014. This is well within safety levels. The bank utilized its debt better than NBS Bank Malawi. The bank did not borrow beyond safety levels more so, given the high borrowing rates prevailing in the country.

Ghana Commercial Bank: The bank’s debt/equity was 24% as at December 31st, 2014. This is also well within safety levels. The bank utilized its debt better than NBS Bank Malawi and Ecobank Ghana. The bank has the best RoE among banks in Africa for 2014 at 41%.

Nigerian Breweries and Lafarge Africa are two companies in Nigeria that have good debt levels; it is not all a bad situation for Nigerian companies. Lafarge is the more cautious of the two. This is expected, given the crises the company experienced about 10 years ago due to excessive debt on its books.

Debt is cheaper than equity and can lower a company’s average cost of capital when utilized. The value of debt becomes a burden when it is excessive and/or not put to good use. It is much easier to take on debt than to get out of it. Many of the often sought after Nigerian companies are shackled by their debt burdens. It is time to hunker down; times have gotten tougher. Good luck to all of them.

*Fejokwu runs an investment analysis blog @: http://judefejokwu.blogspot.com/