The Nigerian corporate debt market is set to witness yet another offering from Dangote Sugar Refinery Plc, as the company moves to raise N50 billion through its 180-Day Series 8 Commercial Paper (CP).
Opening on February 18, 2025, and closing on February 20, 2025, the CP is issued at a 22.6515% discount rate, translating to an effective yield of 25.5%.
Given the company’s recent financial struggles, this move raises questions about its long-term financial sustainability and strategic direction.
A pattern of heavy borrowing
This is not Dangote Sugar’s first foray into the commercial paper market. In June 2024, the company issued Series 4 and 5 CPs, raising N12.93 billion and N29.86 billion, respectively.
These papers were priced at yields of 23.00% for the 181-day Series 4 and 25.00% for the 265-day Series 5.
Later, in December 2024, Dangote Sugar launched Series 6 and 7 CPs, each aiming to raise N50 billion. Series 6, with a 180-day tenor, was issued at a 24.9889% discount rate (28.5% effective yield), while Series 7, spanning 270 days, came at a 24.5524% discount rate (30.0% effective yield).
This steady reliance on commercial paper raises concerns about the company’s ability to finance its operations through internally generated funds.
As of September 30, 2024, its total borrowings stood at a staggering N616.3 billion, marking a 51% increase from N407.7 billion in the first nine months of 2023. The surge in short-term debt is particularly concerning given its composition
- Short-term borrowings jumped from N274 million in the first nine months of 2023 to N573.450 billion in the same period of 2024.
- Commercial paper debt skyrocketed to N141.3 billion in 2024 from zero in 2023.
- Bank overdrafts surged to N61.1 billion from zero in 2023.
The soaring cost of debt
This aggressive debt accumulation has significantly driven up the company’s interest expense, which surged 273% YoY to about N67 billion in the first nine months of 2024. Among the key contributors:
- Interest on commercial paper rose to N14.5 billion (from zero in 2023).
- Overdraft interest hit N6.87 billion (from zero in 2023).
- Interest on letters of credit ballooned by 1,556% YoY to N44.99 billion (from N17.59 billion in 2023).
At the same time, foreign exchange losses soared by 156.6% YoY to N233.5 billion, accounting for 77.8% of total finance costs, which reached N300.175 billion.
A profitability crisis
The surge in finance costs and foreign exchange losses have not only strained cash flows but has also eroded the company’s bottom line, pushing it deeper into financial distress.
- Pre-tax loss in 2023 hit N108.9 billion, marking a 232% increase YoY. In the first nine months of 2024, the losses skyrocketed to N275.6 billion; a 567% surge, driven largely by rising interest expenses, and currency devaluation
- Retained losses stood at N117.5 billion, and shareholders’ funds had turned negative at N105.1 billion.
- Despite generating N484.4 billion in revenue, Dangote Sugar’s ability to turn sales into profit remains significantly impaired.
- A crippling cost of sales (N464.6 billion, or 96% of revenue) left the company with a meagre N19.8 billion gross profit and a paltry 4% gross margin.
Can Dangote Sugar afford its debt strategy?
The company’s growing reliance on commercial paper and short-term funding is an unmistakable red flag, signaling deepened liquidity stress.
Rather than stabilizing, its financial position has further weakened, raising serious concerns about its ability to sustain this debt-driven strategy.
- Severe liquidity strain: As of September 2024, the current ratio had plunged to 0.49x (from 0.77x in 2023), highlighting its severely limited ability to cover short-term obligations.
- Interest burden is overwhelming: Interest coverage collapsed to a dangerously low 0.12x, meaning operating profits are now grossly insufficient to cover interest expenses.
Despite this, Dangote Sugar returned to the commercial paper market in December 2024 and again in February 2025, tightening the liquidity nose further.
Dangote Sugar must reassess its financing structure. Over-reliance on expensive short-term debt is unsustainable.
A shift toward longer-term financing options, possibly through equity issuance, could ease balance sheet pressure.
Meanwhile, strict cost control and an accelerated Backward Integration Plan (BIP) execution will be critical to restoring profitability.
The BIP, which aims to make the company self-sufficient in raw sugar production, envisions a 1.08-million-ton refined sugar output within six years across 150,000 hectares of plantations.
However, execution delays and financial strains have cast doubt on its near-term viability. While the Numan and Nasarawa estates are scaling up milling capacity in 2024, it remains uncertain whether these expansions can materially impact Dangote Sugar’s financial performance in the short term.
The steep decline in gross profit margin to 4.1% in the first nine months of 2024 (from 20.88% in 2023) and the collapse in operating profit margin to 1.69% (from 18.3% in 2023) highlight the severe topline cost pressures. Addressing these inefficiencies is crucial to restoring sustainable margins.
Investor takeaways:
The Series 8 CP’s 25.5% effective yield is undeniably attractive. For risk-tolerant investors seeking high yields with a short-term horizon, the CP may still be worth considering, but only with full awareness of the financial instability and potential default risks.
- Dangote Sugar’s financial pressures have shaken investor confidence: After a 255% surge in 2023, the stock plunged 42% in 2024 before staging a partial recovery to a 13.85% YtD gain in 2025.
- The sharp volatility highlights the uncertainty surrounding the company’s financial future.
- Both CP and equity investors must carefully assess their risk appetite.
While short-term returns may look appealing, Dangote Sugar’s deepening liquidity and profitability crisis make it a highly speculative play, whether in its debt or equity markets.
