NIGERIA – Flour Mills of Nigeria PLC (FMN), one of the largest foods and agro-allied groups, has announced the issue of up to N55 billion Series 3 Commercial Papers (CP) under its NGN200 billion Commercial Paper Programme.

Commercial paper is an unsecured, short-term debt instrument issued by corporations.

In Nigeria, the CP market has remained a viable option for corporate entities looking to raise funds to meet shortfalls in their working capital needs, as well as other short-term expenditures, especially after the impacts of the COVID-19 pandemic.

According to Nairametrics, Flour Mills has a total external borrowing of about N303 billion (US$403M) as of December 2023 out of which about N52.8 billion are commercial papers and bonds. The company’s debt doubled within a year going from about N148 billion (US$197M) to N303 billion.

Nairametrics noted that the CP issuance was open from Friday, 23 June 2023 to Friday, 30 June 2023, aimed at raising short-term funds for the company’s working capital and general corporate purposes.

Founded in 1960, the company has grown to become a leading producer of flour, pasta, noodles, edible oil, sugar, animal feeds, and other food products.

FMN also has significant investments in the agro-allied sector, such as farming, milling, storage, and distribution of grains and other crops.

As a result, FMN is rated “A-” by Agusto & Co and “A” by DataPro, reflecting its strong financial position, diversified product portfolio, extensive distribution network, and dominant market share in the Nigerian food industry.

For the current Series 3 CP issuance, the details provided include a tenor of 239 days with a target size of up to N55 billion, a discount rate of 12.4%, an implied yield of 13.5%, and a minimum subscription of N5 million.

Earnings to enable debt repayments

According to comments from Augusto & Co, one of the rating agencies, Flour Mills’ bond journey will be successful if it generated enough earnings and cash flow to meet the cost of debt.

“Going forward, Flour Mills has successfully registered a Bond Programme of up to ₦200 billion to support its future expansion plans. Whilst we anticipate an uptick in the Company’s gross debt level from issuances under this new Bond Programme, we expect the improvement in both earnings and cash flows to be derived from the debt-induced expansion.

The agencies, however, noted that the Company’s ability to use debt effectively amid rising input and finance costs will need to be demonstrated.

Flour Mills generated a cash flow from operating activities of N36.1 billion in its 9 months results published in December. Its debt repayments including interest amounted to N37.5 billion.

Operating profit (before finance cost) was N51.9 billion in its first 9 months compared to N40.4 billion same period a year earlier. However, its finance cost more than doubled to N37.5 billion, leading to a 50% decline in pre-tax profits.

According to rating agencies, as things stand, the company can continue to repay the loans. However, it will come at the expense of shareholders who will see dividend repayment dwindle in the short term. For example, the dividend paid the whole of last year was just N5.7 billion much less than the debt repayment.

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