Dangote Sugar Refinery announced the successful issuance of its N42.79 billion Series 4 and 5 commercial papers, issued at 23% and 25% respectively.
The papers were issued as part of the company’s N150 billion commercial paper issuance programme.
The Series 4 and 5 issuances comprised N12.93 billion for the 181-day Series 4 and N29.86 billion for the 265-day Series 5.
According to the notice issued by the company, the CP issuance witnessed participation from pension and non-pension asset managers, as well as institutional and individual investors.
Previous CP issuances
As part of its N150 billion commercial paper programme, Dangote Sugar Refinery has issued N39.39 billion in 266-day Series 1 notes at a discount rate of 17.08%. Additionally, the company has issued N6.15 billion in 184-day Series 2 notes at a discount rate of 19.84%.
The company issued N53.47 billion in 254-day Series 3 notes at a discount rate of 21.30%. Hence, with its Series 1 to 5 CPs, Dangote Sugar has raised N141.8 billion.
According to the group’s notice, the company’s strategy of issuing commercial papers aims to diversify its funding sources. The funds raised will be used to support short-term working capital and meet funding requirements.
Dangote Sugar’s Q1 2024 financials reveal that the company incurred interest expenses of N543.2 million on commercial papers, compared to N21.48 million in interest expenses on bank loans.
This indicates that the company’s financing strategy is tilting more towards commercial papers than bank loans.
High interest rates
The high discount rates at which these commercial papers are issued reflect the current high-interest monetary environment in Nigeria. In 2024, the CBN hiked Nigeria’s benchmark interest rate by 750 basis points, to 26.25%, and this action has affected the affordability of working capital for manufacturers.
Essentially, CBN’s action has led to significant hikes in lending rates from banks. For example, as of May 17, 2024, UBA had its lending rates to the manufacturing industry ranging between 28.50% and 32.00%.
Thus, this hike has led companies to seek alternative financing, with debt securities (commercial papers and bonds) being available options. However, in the short-term debt securities market, treasury bills (NT-bills) and OMO bills issued by CBN are competing with commercial papers for investors’ attention.
And in 2024, the yield rates offered by the CBN on NT bills and OMO bills have proven to be very competitive. For example, the 182-day and 364-day NT-bills issued on June 5, 2024, were at a discount rate of 17.5% and 20.67% respectively.
For these CPs to compete favourably, companies have been forced to adopt relatively high interest rates. Dangote Sugar has issued its Series 3, 4, and 5 CPs at discount rates of 21.30%, 23%, and 25% respectively.
Other issuers have also been forced to adopt high interest rates. Coronation Group issued its Series 1 and 2 CPs at discount rates of 19.83% and 21.81% respectively.
Dangote Sugar’s financials
As of Q1 2024, Dangote Sugar posted a N106.9 billion pre-tax loss, as the company incurred an N103 billion loss due to exchange rate changes during the quarter.
During the quarter, Dangote Sugar posted an operating profit of N5.3 billion, representing a 77% year-on-year decline from the N22.9 billion operating profit posted in Q1 2023. The group’s operating margin during the quarter was 4.3%, in contrast with 22.4% as of Q1 2024.
Although a single quarter is not enough to fully assess the company’s operational efficiency, Dangote Sugar’s Q1 2024 results indicate a need for improvement in this area.
