GCR Ratings (GCR) has upgraded Mecure Industries Limited’s national scale long and short-term Issuer ratings to BBB+_(NG) and A2_(NG) respectively. Concurrently, GCR has accorded a long term Issue rating of BBB+_(NG)(EL) to Mecure Industries Funding SPV Plc’s Series 1 Senior Secured Bond (Mecure SPV Series 1 Secured Bond).

The Outlook on the ratings is Stable.

Ratings History – Mecure Industries Limited

Rating Rationale

Mecure Industries Limited’s (Mecure) ratings are supported by relatively strong market share in its niche, steady earnings progression, and above-peer profit margins. However, these are balanced against rising debt, and weak debt service metrics amid high working capital pressures induced by financial support to related parties.

Mecure maintains a mid-to-strong market position in the Nigerian pharmaceutical market, underpinned by a moderately diversified product base that includes over 140 drug formulations across nine therapeutic categories, in line with market demand. These are facilitated by its strong distributive network of over 100 distributors and long-term relationships with key input suppliers.

Underpinned by innovation and volumes growth, revenue has grown at a five-year CAGR of 10.2%, to a high of N17.4bn in FY20 (FY19: N15.8bn). However, revenue has underperformed expectations in both FY19 and FY20, due to capacity underutilisation in some of the product lines.

Similarly, EBITDA progression has been slow with cumulative incremental earnings of only c.N800m between FY18 and FY20, even though earnings margins are above peer average. GCR expects a modest revenue growth (13%-16%) in FY21-22, driven by an increase in capacity or acute medicines and the introduction of new products across other categories, albeit with modest contribution over the medium term.

Slight margin enhancements could emerge from Mecure’s plans to localise the production of nutraceuticals (currently imported as finished drugs), but the overall size will likely remain relatively small.

Management and governance are deemed neutral to the ratings, although GCR notes some deficiencies. The CEO is also the chairman of the Board of Directors and there are related party loans that are not under a solid contract or loan agreement. However, some of these shortcomings should be addressed ahead of the Company’s planned listing on the Nigerian Stock Exchange in the near term.

Although GCR considers Mecure’s balance sheet to be fairly solid, debt service metrics are impacted by low EBITDA and weak operating cash flows. Specifically, operating cash flow coverage of debt has been low over the cycle, due to persistent rise in debt amid high working capital pressures.

While we expect moderate improvement in cash flows on the back of lower interest payments and better working capital management, the coverage metric will remain below the intermediate level.

Similarly, interest coverage has remained weak at around 2.8x since FY17. However, as Mecure has refinanced some of its expensive debt with concessional loans from the Central Bank of Nigeria and more recently, Bonds issued at a favourable rate, we anticipate some improvement in the metric to a range of 4x-5x in FY21-22.

Given the significant investments in capacity expansion in recent years, Mecure has increasingly made recourse to debt funding, with gross debt spiking from just N3.8bn in FY17 to N9.9bn in FY20. This notwithstanding, net debt to EBITDA has remained at a moderate level of 221% between FY18-20 (FY20: 241%).

GCR anticipates an increase in debt by around N1.5bn in FY21, primarily for operational purposes, as Mecure now plans to scale back on capex spending. However, higher projected earnings should see gearing metrics trend below 200% in FY21-22. Access to diverse funding sources and the currently low short-term debt is positively noted.

The liquidity assessment is considered neutral to the ratings. Liquidity coverage is estimated at 1.56x and 1.1x over the next 12 and 24 months respectively, on the back of the low short debt redemption and moderate CAPEX commitments. Given that cash, holdings have been generally low and unutilised facilities are small (N240m at June 2021), adequate liquidity resources are contingent upon sound management of working capital which should help achieve expected solid operating cash flows.

We note that there is ample covenant headroom, with loan covenants not including strict financial ratios. There is an all-asset debenture on Mecure’s assets valued at a forced sale value of N6.5bn.

Mecure Industries Funding SPV Plc (Mecure SPV) was incorporated as a special purpose vehicle with the sole object of raising debt capital through bond issuances for the purpose of purchasing the notes issued by the Sponsor. The final rating of the Series 1 Senior Secured Bond issued by Mecure SPV follows the receipt of final signed transaction documents and is obtained by applying a notching up approach, starting from the long term issuer rating of the Sponsor.

The notching approach involves an assessment of the stressed estimated recovery rate expected from a forced sale of the assets that serve as security for the Issuer’s outstanding bond obligation, under the assumption that the Issuer is in default. The stressed estimated recovery rate of 23.2% does not qualify the secured bond rating for any notch uplift. Nevertheless, the final Mecure SPV Series 1 Secured Bond rating is higher than the indicative rating due to an upgrade to the senior unsecured corporate rating of the Sponsor.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that Mecure will sustain steady revenue progression and remain profitable. We also anticipate that debt and gearing will remain at moderate levels over the rating horizon.