RR, the interest rate and maturity are important considerations. Obviously a longer maturity and lower rate are preferable but do bear in mind, current local currency Nigerian government bonds trade at around 16%, so we are very unlikely to be below those levels. But what I think is much more important is that we are taking away a huge FX mismatch issue. We saw the negative ramifications of this given the recent huge devaluation in NAIRA and the resultant FX losses we incurred given our need to hold large local currency balances (to pay local wages, other local costs) whilst at the same time having to service USD debt. Post this refinancing, those large local currency (Naira) balances (derived from USD-linked long term gas contracts) will be matched to new Naira debt.
Given Nigeria inflation is currently running at 26%, the Naira will continue to depreciate, thus the sooner we get this debt refinance complete, the better. My view is that this would be a big positive for the stock.
Guys, it doesnt matter if the interest rate on the new debt deal is high. Remember they are refinancing a USD term loan using a new Naira-denominated loan. Thus if you are selling gas to Nigerian govt entities at a USD referenced rate and then are paying your financing costs in Naira, even if the interest rate is 10%+, its not a huge deal.
Savannah+ SS + CHAD!! Can we start dreaming big again?? Fingers crossed. I know its been a pretty brutal market for all regardless of whether you are in bonds, equities, property etc so we could all do with some good news.
Hi RR
Sorry I missed your post. On nigeria's recent FX vol and likely affect on loan refinancing I would make the following points:
> FX availability (mainly USD) in Nigeria remains tough. There is a $12bn backlog that needs to be resolved between the govt/ local bank/corps and this will take time
> Currency devaluation & new Central bank governor are both positive steps in resolving this. Concrete steps yet to be announced but market remains hopeful
>> More specifically on the loan:
a) Nigerian bank have been very solid recording record profits for 1H2023 (partly helped by FX positioning)
b) At the local Naira level (not USD) there is an abundance of liquidity and the central banks have been pushing banks to lend more to corporates
c) There is some Middle East and Chinese bank involvement in local financing which should help.
Thus the colour Im getting on Naira denominated loans seems supportive for Savannah's own loan refinancing requirement.
Was about to caution your optimism even though I sense its a bit "tongue in cheek", but at least you seem a bit more relaxed than you were a few weeks back after the publication of earnings.
Good luck to all, and I sincerely hope our patience is rewarded.
A termsheet will usually specify the applicable interest rate, loan maturity, any amortisation payments, loan collateral and any associated loan covenants (rules the company must abide by to maintain availability of the loan). If they already have a termsheet complete with a consortium of lenders, then usually completion is only 5-10 days away max. But thats from my own experience. Dont want to give anyone false hope.
The FX losses themselves were not the "one-off". The one-off was the massive Naira devaluation enacted by the Nigerian central bank. Please see my previous post for more info one why this was done.
In terms of what the company are doing to reduce this risk. The main thing is completing the refinancing of the $300m+ Accugas bank facility (matures in Dec 2025) using a Naira denominated local bank facility. Once this is achieved, the companies largest debt liabilities will have a currency which will match the local currency gas invoices (main source of revenues).
Yes, until this done, FX risk will remain, but the recent huge FX loss is definitely a "one-off". Not in terms of frequency but in terms of size.
Hi Guys
Like many here I'm also an investor and appreciate all the great contributions from the likes of ZENGAS, RR etc and long may that continue. Have not contributed to these forums before but felt it was justified given some of the statements I am reading today. Just some quick points from me:
1) on the Naira devaluation, this along with removal of fuel subsidies was a very important requirement which has put Nigeria on a positive fiscal path. This will allow Nigeria to reduce its fiscal deficit, boost FX reserves and as was mentioned before boost naira liquidity. On the liquidity aspect this is happening but slower than expected. The markets have also taken a positive view on these events with Nigeria USD bonds rallying hard and Nigeria CDS (insurance against default) tightening from a high of 1,250 (may ) to its current level of 757. Yes its still high, but much improved
2) Accugas gas contracts are long dated (15 years) with stable pricing which is denominated in USD. This will help with the refinancing. If you ignore all the exploration/ M&A stuff and just focus on core biz, its pretty solid stable stuff.
3) Yes the big FX loss is very frustrating and Im annoyed that such a large proportion of their cash balance was held in Naira and not all held offshore in USD, but it is what it is. This was a one-off hit and does not reflect the cashflow generating abilities of the Nigerian gas assets which continue to do well. As you will have seen, post balance sheet date, new contracts continued to be signed. EBITDA also increased by 8%
4) on the risk of refinancing. The accugas debt facility (USD denominated and majority of bank loans) matures in Dec 2025. Thus we are not quite in panic stations yet. There is still amply time to explore various finance options. If mgmt are saying they already have a termsheet prepared with a group of lenders than that is a good sign. In theory FX risk should not affect this business given contracts are USD denominated, and currently the biggest chunk of the debt is in USD. The problem arises from the requirement to accept Naira from local customers on those USD denominated gas contracts which creates a short term liquidity risk. Yes that risk hit us hard, but this huge Naira devaluation enacted by the Nigeria Central bank was a massive on-off and unlikely to be repeated.
5) yes the company has alot of debt but Net debt/EBITDA is only 1.9x. Given the long reserve life of its gas assets, stable pricing and 15yr contract length, that’s not a very high net leverage figure. When I got involved with this company in 2020, net debt/ EBITDA was closer to 6x.
6) Alot of the cashflow in H1 2023 was eaten up by adverse movements in working capital mostly related to a big increase in receivables. Results point out that this is expected to reverse in H2 which should help with free CF generation and debt reduction
Anyways chin up lads, hope ive added some decent colour. Good luck all.