tak agro p lc. - fmdq group
TRANSCRIPT
TAK Agro Plc.
₦15 Billion 16.49% Seven-Year Fixed Rate Secured Senior Bond Due 2026 (Series 1)
under a ₦50 Billion Bond Issuance Programme
2020 Final Corporate Bond Rating Review
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2020 Corporate Bond Rating Review Report
2020 Corporate Bond Rating Review Report
TAK AGRO PLC ₦15 Billion Seven-Year 16.49% Fixed Rate Senior Secured Bond Due 2026 (Series 1) under the
₦50 Billion Medium Term Programme
Issue Rating
Bbb+
Outlook: Stable
Issue Date: 7 December 2020
Expiry Date: 31 October 2021
The Issue rating is valid throughout the life
of the instrument and will be subject to
annual monitoring and review.
Sponsor’s Rating: Bbb+
Expiry Date: 30 June 2021
Analysts:
Christian Obiezu [email protected]
Isaac Babatunde [email protected]
Agusto & Co. Limited
UBA House (5th Floor)
57, Marina
Lagos
Nigeria
www.agusto.com
RATING RATIONALE Agusto & Co. affirms the “Bbb+” rating assigned to TAK Agro Plc’s (“TAK Agro”,
“the Issuer”, or “the Company”) ₦15 Billion 16.49% Seven-Year Fixed Rate
Senior Secured Bond Due 2022 (“Series 1”, “the Bond” or “the Issue”) under the
₦50 Billion Medium Term Programme. The assigned rating mirrors the
standalone rating of TAK Logistics Limited (“TAK Logistics”, “the Sponsor” or
“the Obligor”), which is rated Bbb+ by Agusto & Co1. The Sponsor irrevocably
and unconditionally pledges its operating cash flow as the primary source of
repaying the Bond obligations. In addition, we have considered the funds set
aside in a Cash Reserve Account2 (“Reserve Account”) as a form of security
arrangement for the Issue.
The Series 1 Bond was issued on 15 November 2019 to finance the Sponsor’s
capital expansion through the acquisition of 250 new trucks. Both the amortised
principal portion and the fixed rate coupon are payable semi-annually in arrears
over the seven-year tenor of the Bond from the operating cash flow of the
Sponsor.
In addition to the amount held in the Reserve Account (amounting to ₦1.9
billion), the Series 1 Bond is equally backed by fixed and floating charges over
assets and receivables of the Sponsor (including the new 250 trucks acquired
with the Bond proceeds) as well as charges over silo3 complexes pledged by
Matrixville Limited (“the Security Provider” or “Matrixville”), perfection of which,
is still ongoing at the time of this review. However, Agusto & Co did not
appraise the forced sale value and estimated rental income derivable from
these storage facilities in our analyses due to the uncertainty regarding
Matrixville’s legal rights to create security interest on these facilities.
1 Agusto & Co affirmed its “Bbb+“ rating of TAK Logistics Limited on 4 September 2020 and attached a stable outlook to the Obligor. 2 In line with the executed Security Trustee Deed, the Issuer and the Sponsor pledge to ensure that the balance in the Cash Reserve Account over the
life of the Series 1 Bond stands at ₦1.9 billion, representing one-time semi-annual coupon and principal repayment 3 Matrixville Limited has been granted the right to occupy and use silo complexes located in Jigawa, Kebbi, Kaduna, Abuja and Kwara State under a
ten years Concession Agreement with the Federal Government of Nigeria (FGN). The FGN remains the ultimate owner of the silos.
Satisfactory quality with moderate credit risk; adequate capacity to pay returns
and principal on local currency debt in a timely manner.
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2020 Corporate Bond Rating Review Report
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc has continued to meet the Bond obligations as and when due,
albeit with recourse to funds available in the Cash Reserve Account. As at 15
November 2020, the Issuer had paid ₦3.69 billion to the Series 1 Bondholders
representing two instalments of semi-annual coupon of ₦2.24 billion and
principal repayment of ₦1.27 billion.
As at 31 December 2019, TAK Logistics Limited’s total assets (excluding
restricted cash held in the Reserve Account), which stood at ₦16.72 billion
comprised long-term assets (80%), cash & equivalent (13%) and trading assets
(7%). In the event of a default at any time during the life of the Series 1 Bond,
we reckon that the Bondholders will be able to recover at least one half-yearly
coupon payment from the fund held in the Reserve Account, while the
outstanding principal obligation on the Series 1 Bond will be met from amounts
to be realized from the disposal of the Sponsor’s pledged assets and receivables,
upon perfection.
Based on the aforementioned, we attach a stable outlook to TAK Agro Plc’s
Series 1 Bond.
Figure 1: Rating Triggers
An upgrade to the standalone credit
rating of TAK Logistics Limited – the
Sponsor
Non-renewal of the Sponsor’s yearly
logistics management contract with
the Nigeria Sovereign Investment
Authority (NSIA)
Decrease in average truck deployment
rate below 150 trucks (60% of fleet)
leading to significant shortfall in
earnings.
Positive
Negative
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2020 Corporate Bond Rating Review Report
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
BOND STRUCTURE & ADEQUACY OF PAYMENT ACCOUNT
TAK Agro raised ₦15 billion from the capital market on 15 November 2019, under its Series 1 Bond Issue, at a fixed
annual interest rate of 16.49% payable semi-annually over the life of the Bond. The Series 1 Bond has a seven-year
tenor, with the final maturity date being 15 November 2026. The principal repayment on the Bond started in May
2020 as stipulated in the amortization schedule. The Series 1 Bond constitutes a direct, senior secured obligation
of the Issuer and shall be redeemed primarily from TAK Logistics Limited’s (the Sponsor) operating cash flows.
The Bond is backed by an unconditional undertaking of the Sponsor as well as the fixed and floating charges over
assets and receivables of the Sponsor and charges over the five silos4 pledged by Matrixville Limited (the Security
Provider). As part of the security arrangement for the Series 1 Bond, a Cash Reserve Account5 (CRA) was opened on
16 July 2019 and funded with ₦1.9 billion – the equivalent of a one-time semi-annual interest and principal
obligations. The funds in the CRA can be used to cover shortfalls in the payment account on each redemption date
but must be replenished by the Sponsor within the next 30 days in line with the Series 1 Trust Deed.
The entire agriculture value chain in Nigeria has witnessed steady growth over the last few years on account of
the increased funding through various programmes including the Presidential Fertilizer Initiative (PFI) and the
Central Bank of Nigeria’s Anchor Borrowers’ Programme (ABP). However, like other agro-based dealers, TAK
Logistics Limited’s operations are susceptible to changes in government policies, which became evident during the
last election cycle following the temporary suspension of the PFI programme in the run-up to the 2019 elections.
In 2020, the Company’s operations were negatively impacted by spiraling security situation in the country’s farm
belt, COVID-19 disruptions, which delayed the shipment of the new trucks, and most recently, the civil unrest that
trailed the peaceful #EndSARS protests in the country. Despite these challenges, TAK Logistics has maintained
reasonable scale of operations evidenced by a 39% increase in topline performance in the first nine months of
2020 compared to similar period in the prior year. The growth in revenue in Q3’2020 was driven largely by the
reintroduction of the PFI programme as well as the Company’s expanding private sector clientele.
As at 30 November 2020, TAK Agro Plc had paid a total sum of ₦3.7 billion to the Series 1 Bondholders, which
represented the Issue’s first and second semi-annual coupon and principal repayment installments. On both
redemption dates, the built-up balance in the payment account was insufficient to meet the bond obligations, which
necessitated the withdrawal of funds from the CRA. The Bond Trustee confirmed that the Sponsor replenished the
amount withdrawn from the CRA for the first coupon and principal repayment within the stipulated time frame,
while they expect the Sponsor to make good the current shortfall of ₦845,427,318.20 utilised to settle the second
coupon and principal repayment by 15 December 2020. The next coupon and principal repayment date, in line with
the amortisation schedule, is 15 May 2021.
The Bond Trustee flagged the non-remittance of the stipulated monthly deposits into the sinking fund account in
October 2020 as a breach of covenant and pledge specified in the Trust Deed although this was largely due to the
4 Matrixville Limited has been granted the right to occupy and use silo complexes located in Jigawa, Kebbi, Kaduna, Abuja and Kwara State under a
ten years Concession Agreement with the Federal Government of Nigeria (FGN). The FGN remains the ultimate owner of the silos. 5 The CRA is being managed by the Bond Trustee – PAC Trustees Limited
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2020 Corporate Bond Rating Review Report
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
adverse impact of the civil unrest and social instability in the aftermath of the #EndSARS protests across the country
on the Sponsor’s business operations. With the slow rebound in economic activities following the relaxation of
curfews in all the states, we expect a spike in the demand for transport services within the agriculture value chain,
especially during the harvest season, which should boost TAK Logistics Limited’s operating cash flow and ability
to meet maturing obligations on the Series 1 Bond.
UTILIZATION OF BOND PROCEEDS – STATUS UPDATE In line with the duly executed Series 1 Pricing Supplement and Trust Deed, the Company utilised the net proceeds
to purchase intercompany notes from the Sponsor, who in turn, used 84.7% of the total amount for the acquisition
of 250 new trucks and construction of fleet maintenance and repair workshops. The rest of the net proceeds was
used to fund the Sponsor’s working capital needs.
Table 1: Schedule of Utilization of Series 1 Bond Proceeds - 30 November 2020
Description Amount
(₦’000)
% of net
Bond
Proceeds
Status
Acquisition of 250 new trucks 12,546,062 83.6% Immediate
Funding for working capital needs 1,951,600 13.0% Immediate
Construction of a truck yard for the new fleet 158,388 1.1% Ongoing
Professional fees (transaction cost) 343,950 2.3% Immediate
Total 15,000,000 100%
TAK Logistics Limited took delivery of 108 Semi Knock-Down (SKD)6 trucks from the original equipment
manufacturer – MAN Truck & Bus SE in January 2020, while the shipment of the remaining batch of 142 trucks
was stalled by the COVID-19 disruptions. However, management confirmed that the remaining truck cargo arrived
the Nigerian ports in October 2020 and are awaiting the custom’s clearance process. Due to the time delay between
when the first batch of 108 trucks were received and when they were assembled and put to use, the Sponsor has
decided to bring in the other batch of 142 trucks as fully assembled from MAN Truck & Bus SE instead as SKD, in
order to get the full fleet ready by year-end 2020.
In the same vein, TAK Logistics Limited has leased a property to serve as operational hub and truck maintenance
workshop in Port Harcourt while the construction of Kaduna and Ajaokuta sites are still ongoing as at 30 November
2020.
While noting the delayed shipment of the 250 trucks owing to the COVID-19 induced disruptions to global
production and supply chain, TAK Logistics Limited has had to depend on rented trucks from third parties to
augment available fleet. With the Sponsor set to have the full complement of the new 250 trucks by year-end 2020,
we estimate improvement in the Company’s earnings and operating cash flow considering the increasing demand
for haulage services within the agriculture value chain.
6 The Company has fully assembled and commissioned 95 out of the 108 delivered trucks
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2020 Corporate Bond Rating Review Report
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
OUTLOOK ON BOND REPAYMENT
In recent times, the agriculture sector has witnessed steady growth supported by increased funding from the
Federal Government of Nigeria towards attaining food security and economic diversification, which will reduce the
country’s vulnerability to external shocks in the global oil market. According to the latest data from the Nigerian
Bureau of Statistics (NBS), the Nigerian economy slipped into its second recession in five years as the gross
domestic product (GDP) contracted by 3.62% in the third quarter of 2020 (Q3’2020) – the second consecutive
quarter the country is recording a negative growth following a 6.1% contraction in Q2’2020. With oil prices not
expected to hit pre-COVID levels until 2022, the agriculture sector, just like in the 2016 recession, remains one of
the biggest recession resilient sectors to help fast-track the country’s economic recovery. Hence, we expect
intensity in the ongoing funding supports and interventions to farmers, which will translate to enormous growth
opportunities for businesses within the agriculture value chain (including logistics providers).
Despite the COVID-19 disruptions and delayed deployment of the new trucks, we note that TAK Logistics Limited’s
financial condition in the nine months period ended 30 September 2020 (unaudited) was characterised by good
profitability, adequate working capital, improving cash flow and high leverage. The Sponsor’s good revenue and
profit levels in the period under review were supported by the spike in demand for haulage services following the
re-introduction of the PFI programme in early 2020 as well as additional earnings from new contracts (such as the
CBN’s Anchor Borrowers’ Programme). Going forward, the projected increase in demand for logistics services on
the back of anticipated growth in farming activities and the prospects of having the full complement of the 250
new trucks in operations should further strengthen the Sponsor’s overall financial performance in the near to
medium term.
Since the issuance of the Series 1 Bond in November 2019, TAK Agro Plc has continuously met the Issue’s
obligations, albeit, with recourse to the Cash Reserve Account as the Sponsor’s remittances into the payment
account was slightly affected by disruptions in the business and operating environment during the year. As at 30
November 2020, the Company had paid a total of ₦3.69 billion to the Series 1 Bondholders covering principal
repayment amounting to ₦1.27 billion and coupon payment of ₦2.42 billion. Based on TAK Logistics’ improving
cash generating capacity reinforced by ongoing diversification of earning sources through acquisition of more
private sector clients to somewhat expand the Company’s existing sole-customer structure as well as planned
introduction of new service lines (cold chain logistics for fruits and vegetables), we remain positive that the Issuer
will continue to meet coupon and principal repayment obligations on the Series 1 Bond as and when due.
Based on the aforementioned, we attach a stable outlook to the Series 1 Bond.
This rating report should be read in conjunction with Agusto & Co.’s 2020 Corporate Rating Report for TAK Logistics Limited
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2020 Corporate Bond Rating Review Report
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
RATING DEFINITIONS
Aaa Highest quality debt issue with minimal credit risk; strongest capacity to pay returns
and principal on local currency debt in a timely manner.
Aa High quality debt issue with very low credit risk; very strong capacity to pay returns and
principal on local currency debt in a timely manner.
A Good quality debt issue with low to moderate credit risk; strong capacity to pay returns
and principal on local currency debt in a timely manner.
Bbb Satisfactory quality debt with moderate credit risk; adequate capacity to pay returns
and principal on local currency debt in a timely manner.
Bb Below average quality debt with moderate to high credit risk; speculative capacity to
pay returns and principal on local currency debt in a timely manner.
B Weak quality debt with high credit risk; speculative capacity to pay returns and principal
on local currency debt in a timely manner.
C Very weak capacity to pay returns and principal. Debt instrument with very high credit
risk.
D In default.
Rating Category Modifiers
A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category. Therefore,
a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the -
(minus) sign.
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2020 Corporate Bond Rating Review Report
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
TAK Agro Plc’s ₦15 Billion 7-year 16.49% Fixed Rate Secured Senior Bond Due 2026 (Series 1)
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2019 Corporate Bond Rating Review Report
www.agusto.com
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Nigeria.
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Email: [email protected]