Moody’s Ratings (Moody’s) has affirmed the Caa1 corporate family rating (CFR) of Dangote Sugar Refinery Plc (DSR). Concurrently, Moody’s has repositioned the national scale rating (NSR) to Ba1.ng from Baa3.ng. The rating outlook has been changed to stable from positive. Dangote Sugar Refinery is the largest Sub-Saharan African sugar producer and refiner based in Nigeria.

The global rating agency attributed the change to the negative impact of the Naira devaluation on the operations of DSR. The rating agency, in a statement, said, “The affirmation of DSR’s Caa1 CFR and change in outlook to stable with the repositioning of the NSR to Ba1.ng reflects Moody’s view that the company’s raw material import business model continues to be negatively affected by the sharp devaluation of Nigeria’s currency, the Naira, against the US dollar during the last 12 months. The currency devaluation has deteriorated DSR’s liquidity position and materially increased its letters of credit (LoC) in Naira terms, weakening the company’s credit profile.”

It should be noted that in June 2023, the Central Bank of Nigeria (CBN) announced the unification of its multiple foreign exchange windows, merging all official rates into its Investors and Exporters window, which has significantly devalued the Naira, particularly in June 2023 and February 2024, from around 460 Naira per USD in June 2023 to around 1,500 in February 2024.

The positive action to be taken against the headwinds of the currency situation in Nigeria is to focus on the Backward Integration Plan for sugar production in Nigeria. DSR has made significant investments and will continue to grow the size of the local sugar production capacity, given the devaluation of the currency, which has made locally produced sugar have a significant profit margin compared to imported sugar. DSR has intensified production activities at its Numan and Nasarawa sugar plantations.

According to Moody’s, factors considered in the rating of DSR include the positive industry fundamentals supported by government regulation and Nigeria’s demographic and societal trends, DSR’s market positioning as Nigeria’s largest manufacturer and seller of refined sugar, low levels of Moody’s adjusted debt of NGN62 billion excluding letters of credit, and a track record of an adequate operating margin of 18 per cent over the last five years and capacity to pass through additional costs, albeit with a lag.

Also, the ratings, according to the agency, reflect the company’s exposure to Nigeria, a country that has high social, political, economic, and regulatory risks; high exposure to foreign currency risk due to hard currency imports and local sales under a depreciating Naira currency scenario; and exposure to commodity price risk volatility through raw material imports of sugar.

“The stable outlook reflects our expectation that DSR’s volumes will grow towards the levels achieved in 2022 over the next 18 months. The stable outlook also assumes that the company’s outstanding letters of credit with banks will be rolled over and not increase in size.”