Cadbury Nigeria Plc is set to transform its foreign-currency loans from parent company Cadbury Schweppes Overseas Ltd. into equity as it grapples with soaring financing costs triggered by the devaluation of the naira. The move comes in the wake of an acute dollar shortage in Nigeria, which has severely impacted the company’s ability to meet interest payments.
In a bid to alleviate the burden of foreign exchange risk and its detrimental effects on earnings, Cadbury Nigeria will seek shareholder approval on February 8 to convert an outstanding $7.7 million debt. This conversion is expected to reduce the firm’s financial expenses significantly, ultimately leading to improved profitability.
Over the past three years, Cadbury Nigeria has borrowed a total of $23 million from Mondelez International Inc.’s subsidiary. However, due to the naira devaluation last year, the company faced substantial interest obligations. This resulted in an unrealized exchange loss of 20.6 billion naira and an after-tax loss of 10.2 billion naira as of September. While some of the loan has been settled, an outstanding balance of $7.7 million remains, with an expected foreign exchange loss of 13.5 billion naira in 2023.
President Bola Tinubu initiated foreign-currency reforms in June to attract inflows, which led to the local unit’s depreciation by approximately 50% against the dollar in the same year. This depreciation compelled numerous Nigerian corporations to declare losses as they recalibrated their overseas loans and letters of credit using the weaker exchange rate.
To address the dollar scarcity issue, Central Bank Governor Olayemi Cardoso has implemented measures aimed at easing access to dollars. This includes clearing a backlog of unmet demand that had previously discouraged foreign investors from bringing funds into Nigeria.
The decision by Cadbury Nigeria to convert its dollar loans into equity underscores the challenges faced by Nigerian businesses in navigating the country’s volatile forex market. As companies adapt to these changing conditions, financial strategies like debt-to-equity conversion are becoming increasingly common in a bid to safeguard their financial stability and long-term profitability.
