tak agro p lc. - fmdq group

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


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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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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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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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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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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RATING DEFINITIONS

Aaa Highest quality debt issue with minimal credit risk; strongest capacity to pay returns


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


Bbb Satisfactory quality debt with moderate credit risk; adequate capacity to pay returns


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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Nigeria.

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Email: [email protected]

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