Chapel Hill Denham warns dollar loans can erode shareholder value

Chapel Hill Denham has warned that dollar-denominated loans are becoming a major threat to Nigerian companies that earn most of their revenue in naira. The investment research firm says currency depreciation can wipe out strong operating performance and destroy shareholder value.

In a new report, the firm said the biggest risk facing investors in Nigerian and other frontier-market equities may not be poor management, weak corporate governance or sluggish economic growth. The greater danger, it argues, is the currency in which companies finance their operations.

Currency mismatch and investor returns

The report says companies that generate naira revenues should finance their assets with naira equity and naira debt, not dollar-denominated parent-company or related-party loans. That structure provides a natural hedge against currency depreciation, while foreign-currency debt creates a mismatch that can turn a sharp fall in the naira into major losses for shareholders.

Chapel Hill Denham examined exchange-rate and inflation data for nine major African economies and India between 1990 and 2025. It found that annual currency movements were hard to predict, with inflation differentials accounting for only 14.6 percent of year-to-year exchange-rate movements. Over longer periods, the relationship strengthens. Long-run inflation differentials with the United States explained 98.3 percent of currency levels across the 10-country sample, with a pass-through coefficient of 0.962, close to one-for-one.

For Nigeria, the long-run relationship is among the strongest. The naira's path has broadly reflected Nigeria's inflation gap with the United States, despite sudden and hard-to-time devaluations.

For unhedged foreign investors, that creates a high return hurdle. Chapel Hill Denham estimates that where purchasing-power-parity depreciation is about 15 percent annually, as it approximates for Nigeria, an investment must generate more than 30 percent annual growth in naira terms to deliver a 15 percent annual return in dollars. Markets with annual currency depreciation of about 3.5 percent would need local-currency returns of about 18.5 percent. Kenya and Morocco, with depreciation near seven percent, would need about 22 percent. Angola and Ethiopia, with depreciation of roughly 25 percent, would need about 40 percent.

Unilever and Nestlé case study

The report compared listed subsidiaries of Unilever and Nestlé in India, Nigeria, Indonesia and Malaysia. Indian subsidiaries, largely funded through internal cash and local-currency debt, outperformed their global parents in dollar terms. Nigeria produced the opposite outcome.

Nestlé Nigeria and Unilever Nigeria recorded strong operating performances in naira terms, but dollar returns were weakened by naira depreciation and exposure to dollar-denominated related-party and shareholder loans. Over 22 years, Nestlé Nigeria generated an annualised naira return of 14.9 percent, higher than the 13.6 percent recorded by Hindustan Unilever in rupees. But Nestlé Nigeria's annualised dollar return was only 3.4 percent, compared with 9.9 percent for Hindustan Unilever.

The difference was not simply management quality or business performance, the report argues. Indian subsidiaries carried little or no foreign-currency debt, while Nigerian companies had substantial dollar-denominated related-party financing. When the naira depreciated sharply in 2023 and 2024, the naira value of those liabilities jumped, putting pressure on shareholders' equity. Nestlé Nigeria recorded a foreign-exchange loss of N290.7 billion in 2024, temporarily pushing its reported equity into negative territory.

What investors should do

Chapel Hill Denham says strong earnings growth, powerful brands and good corporate governance do not necessarily shield shareholders from currency mismatches. It advises investors to pay close attention to companies' debt notes and related-party financing arrangements when assessing Nigerian equities.

The report notes Nigerian equities remain relatively cheap. The broad market was trading at about eight to 11 times forward earnings, while the MSCI Nigeria Index traded at 7.75 times trailing earnings at the end of July. The S&P 500 traded at roughly 20 to 23 times forward earnings.

The opportunity in Nigerian equities, the report says, is not simply buying assets because they look cheap. Investors need companies whose balance sheets allow local operating growth to survive naira depreciation when translated into dollar returns. For Nigerian businesses earning mainly in naira, dollar debt can turn currency depreciation into a direct hit on shareholder value.