GCR accords a final Bond rating of AA-(NG) to Lagos State Government of Nigeria’s N47bn Bond Issue

24 Feb 2017 In Rating Notifications

GCR accords a final Bond rating of AA-(NG) to Lagos State Government of Nigeria’s N47bn Bond Issue

Lagos, 23 February 2017—Global Credit Ratings has assigned a final public rating of AA-(NG) to Lagos State Government of Nigeria’s (“Lagos State”, “the State”, or “the Issuer”) Programme 3 Series 1 N47bn Fixed Rate Bonds (“the bonds”); with the outlook accorded as Stable. The rating will expire in July 2017.

GCR has received executed copies of final transaction documents.

RATING RATIONALE

Lagos State secured approval from the Securities and Exchange Commission (“SEC”) to issue bonds into the Nigerian capital market, under a new N500bn bond issuance programme (“Programme 3”). In November 2016, GCR had accorded an indicative AA-(NG) rating to the proposed N60bn Series 1 issue, but the State was only able to raise an initial N47bn in Series 1 Bonds, as a result of unfavourable market conditions. The bonds are priced at a fixed interest rate of 16.5% per annum, and have a seven year tenor, with legal maturity date of 30 December 2023. Interest on the bonds will accrue from issue date and will be payable semi-annually in arrears in June and December of every year, until maturity. The net proceeds from the Bond Issue will be utilised to further accelerate development, with a significant amount to be allocated to the construction/upgrade of roads and bridges, provision of transportation facilities, health facilities and the development of waterways transportation.

The N47bn Bonds are secured by an Irrevocable Standing Payment Order (“ISPO”) approved by the Federal Ministry of Finance and transfers from the Consolidated Debt Service Account (“CDSA”), covering both the interest cost and principal redemption. As a result, a one notch rating uplift from the Issuer rating is considered appropriate for the Bond Issue.

As the Series 1 Bond is senior unsecured obligation of the Issuer, any change in the rating assigned to the Issuer will directly affect the Bond rating. Lagos State’s Issuer rating was affirmed at A+(NG) in August 2016, with the outlook accorded as Stable.

RATING RATIONALE OF THE ISSUER

The diversified stream of revenues from taxes has provided a base for accelerating development in all facets, including critical infrastructure, thus creating an enabling environment for businesses to thrive within the State. In this regard, while most States have struggled to effectively meet their obligations over the last 18 months, as a result of dwindling allocations from the Federal Government of Nigeria (“FGN”), Lagos’ collections from taxes and other Internally Generated Revenue (“IGR”) have been sufficient to effectively meet its recurrent expenditure and other capex requirements. Notwithstanding this, Lagos’ financial performance could not fully withstand the economic environment, as total revenue declined (for the first time over the five-year review period) by 6% to N384.4bn in F15 (82% of budget). While the N14.6bn decrease in statutory receipts to a six-year low of N43.8bn was attributed directly to the sustained fall in the global oil price, IGR (inclusive of VAT receipts) also dipped to N340.6bn (F14: N349.7bn) due to the weaker general economy.

As Lagos was able to reduce costs in certain areas, recurrent expenditure was slightly lower at N240.3bn in F15. This saw the State report an operating surplus before debt service charges of N193.5bn, which covered interest by an unchanged 3.9x. Thus, the net operating surplus of N143.8bn equated to a reduced 37.4% operating margin (F14: 40.5%).

Capex fell to a six-year low of N174bn in F15 (still relatively high), attributed to the lower than expected surplus and disbursement constraints. Capex was partly facilitated by borrowings, with the State reporting a N38.2bn rise in debt to a new high of N619.3bn at FYE15. As a consequence, gross and net debt to total revenue increased further to 161% and 124% respectively (FYE14:142% and 11%). The N47bn Bond Issue (under the N500bn Programme) should see gross debt rise to around N653.5bn by FYE16 (after accounting for other redemptions and issuances). Nevertheless, gross debt to revenue is expected to fall to around 130% at FYE16, before gradually reducing to around 123% by FYE19, in line with higher income projections and repayments.

 

 

NATIONAL SCALE RATINGS HISTORY

Rating Class
Rating
Outlook
Date
       
Initial Rating      
Issuer rating: A(NG) Stable September 2011
Programme 1 series 2 (N57.5bn) A(NG) Stable September 2011
Programme 2 series 1 (N80bn) A+(NG) Stable August 2012
Programme 2 series 2 (N87.5bn) AA-(NG) Stable August 2013
Programme 3 Series 1 (N47bn) AA-(NG) Stable February 2017
       
Last Rating      
Issuer rating: A+(NG) Stable August 2016
Programme 1 series 2 (N57.5bn) A+(NG) Stable August 2016
Programme 2 series 1 (N80bn) AA-(NG) Stable August 2016
Programme 2 series 2 (N87.5bn) AA-(NG) Stable August 2016
       
       

 

ANALYTICAL CONTACTS

Primary Analyst

Kunle Ogundijo

Analyst

Lagos

+23 41 462 2545

.(JavaScript must be enabled to view this email address)

Committee Chairperson

Dave King

Chairman

.(JavaScript must be enabled to view this email address)

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities, updated February 2016

Lagos State Government Rating Reports (2011 – 2016)

Lagos State Government Final Bond Rating Report, February 2017

Glossary of Terms/Ratios (February 2016)

 

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.

 

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity; d) the rating is valid until July 2017.

Lagos State participated in the rating process via face-to-face management meeting, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating has been disclosed to Lagos State with no contestation of the rating

The information received from Lagos State Government of Nigeria and other reliable third parties to accord the credit rating included;

  • the audited accounts for the year ended 31 December 2015 (plus four years of comparative numbers);
  • a 10-year forecast, including the approved budget for 2016
  • Final executed documents relating to the Bond Issue- Programme Trust Deed, Supplemental Trust Deed, Shelf Prospectus, and Pricing Supplement.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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