Findings from the financial statements of the companies show that they have resorted to very expensive bank borrowings to sustain their businesses, increasing their exposure to the banks to N1.834 trillion in the first half of the year 2023, H1’23, a 24.5% increase against N1.473 trillion in the corresponding period of 2022, H1’22.
Data obtained from 11 leading companies listed on the Nigerian Exchange Limited, NGX, revealed that the finance cost from the borrowing rose astronomically by 411.2% to N330.972 billion in H1’23 from N64.745billion in H1’22.
The rising finance cost is majorly driven by the steady increases in Monetary Policy Rate, MPR, by the Central Bank of Nigeria, CBN, which hit 18.75% as at last month.
The MPR is the benchmark for determining the interest rate charged by banks.
The 11 leading companies are: Nestle Nigeria Plc, Unilever Nigeria Plc, Cadbury Nigeria Plc, Nigerian Breweries Plc, Dangote Sugar Refinery Plc, NASCON Allied Industries Plc.
Others include: Guinness Nigeria Plc, MCNICHOLS Consolidated Plc, BUA Foods, P Z Cussons Nigeria Plc, and International Breweries Plc.
Analysts and investment experts have decried the high cost of borrowing from the banks, saying that capital market equity remains the best financing option for the manufacturers for long term to meet operational needs.
They also advised manufacturing companies to consider Commercial Papers (CPs) for short term in order to reduce finance cost and avoid banks’ stringent conditions.
Top five borrowers
International Breweries led the borrowing chart in relative terms rising by 175.5% to N305.300 billion in H1’23 from N110.799 billion in H1’22. It was followed by Unilever Nigeria whose borrowing went up by 109.3% to N49.943 billion from N23.859 billion in H1’22.
Guinness Nigeria occupied the third position rising by 103.6% to N63.755billion in HI’23 from N31.309 in H1’22. It was followed by Nestle Nigeria occupying the fourth position as its borrowings rose by 79.9% to N264.436 billion from N147.006 billion while Nigerian Breweries Nigeria occupied the 5th position borrowing N253.153 billion, a 13.9% rise against N222.249 billion.
Commenting on the situation 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.”
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 re-price 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.”
He further said: “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.”
Government intervention
On government interve-ntion, 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.”
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