GCR affirms Cross River State Govt. of Nigeria’s National Scale Rating at BBB-(NG); Outlook Negative

17 Dec 2015 In Rating Notifications

GCR affirms Cross River State Govt. of Nigeria’s National Scale Rating at BBB-(NG); Outlook Negative

Lagos, 17 December 2015—Global Credit Ratings has affirmed the long term national scale rating assigned to Cross River State Government of Nigeria at BBB-(NG), with the outlook accorded as Negative. Concurrently, the national scale rating accorded to the Series 1: N8bn Fixed Rate Bond was also affirmed at A-(NG), with the outlook also accorded as Negative.

The long term issuer and bond ratings are valid until November 2016.


RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Cross River State Government of Nigeria (“Cross River State or the State”) based on the following key criteria:

Total revenue peaked at a high N58.7bn in F11, but revenue has since evidenced successive declines (albeit marginal) to N55.2bn in F14 (F13: N56.2bn). The initial growth was spurred by much higher statutory receipts, but such receipts have declined as a result of the State’s loss of its designation as an oil producing State (including the 13% derivation fee receivable). Added to this, the sustained fall in global oil prices since 2H F14 resulted in lower statutory receipts, albeit that the full negative impact of lower oil prices will only be reflected in F15 and F16.

The decline has, however, been partially moderated by higher Internally Generated Revenue (“IGR”), which almost doubled over the six year period to a high N13.4bn in F14, thus evidencing the relative success of the revenue generation policies being implemented. Nevertheless, IGR level remains well below what is required to fund recurrent expenditure, with personnel costs surpassing IGR in all the years under review. The low level of IGR receipts relative to expenses has entrenched the State’s reliance on the Federal Government of Nigeria (“FGN”) for financial sustenance, with statutory receipts accounting for an averaged 79% over the last five years (F14: 76%). Nevertheless, due to receipts from the FGN, Cross River has consistently reported operating surpluses over the review period.  With the surplus remaining flat on N15.7bn in F14, (and much lower than the N26.3bn reported in F11), the surplus margin rose to 28.4%, from 27.4% in F13

While cost rationalisation measures in place resulted in a 3% decline in recurrent expenditure to a three-year low of N39.5bn, personnel costs have remained high, consuming a higher 40% of revenue in F14. This remains above GCR sustainable benchmark of 35%, indicating that staff numbers need to be reduced. In the absence of such action, financial flexibility will remain constrained, with fewer available funds for developmental purposes.

Cross River’s gearing profile has remained elevated, with debt rising by N15.1bn to a high of N74.5bn at FYE14. As a consequence, the gross debt to income ratio rose further to 135% (FYE13: 106%), while net debt to income ratio spiked to 124% at FYE14 (FYE13: 89%). Similarly, liquidity metrics worsened as days cash on hand declined to 56 days from 85 days in F13, following the decline in cash resources. In May 2015 the State also issued an N8bn bond, which could add further to debt (albeit likely offset by some debt repayments). Nevertheless, as part of palliative measures to reduce the financial strain on States following the sustained decrease in oil prices, Cross River had commercial loans of N33.8bn converted into FGN bonds (with lower interest rates and longer tenors). The State also received N7.9bn in soft loans from the Central Bank of Nigeria (“CBN”) under a special intervention fund in 3Q F15.

The Series 1 N8bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order (“ISPO”) approved by the FGN, covering both the interest cost and principal redemption. As a result of this credit support, the bond has been accorded a three-notch rating uplift relative to the issuer rating.

The negative outlook assigned to both the issuer and the bond ratings reflects the large negative impact that the fall in global oil prices has had on FGN’s finances and those of Cross River State, and specifically the State’s high debt level relative to IGR. Given these challenges, positive rating action is unlikely in the short term. However, a rebound in oil prices, together with sustained growth in IGR and the demonstrated ability to expand and diversify the State’s economic base, could result in positive ratings action over the medium-long term. In contrast, the ratings could come under further pressure in the event of a sustained decrease in statutory receipts and/or IGR (negatively impacting operating cash flows). Were debt levels to rise further, this could also lead to further deterioration in the ratings. As the bond rating is directly linked to the issuer rating, any positive or negative movement in the issuer rating would have a direct impact on the Issue rating.


NATIONAL SCALE RATINGS HISTORY

* The State had initially applied to raise N31.95bn in bonds under series 1, however, It was only able to issue N8bn bonds in May 2015, given the unfavourable market condition at the time.


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 2015)
Cross River State Government Rating Report 2014
Glossary of Terms/Ratios (February 2015)
Market alert, 18 May 2015 - GCR Downgrades five State government ratings, places the Nigerian sub-national sector on ‘Negative Outlook’


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 ratings are valid until November 2016.

Cross River State participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Cross River State with no contestation of the ratings.

The information received from Cross River State Government of Nigeria and other reliable third parties to accord the credit rating included:
- the unaudited accounts for the year ended 31 December
- four years of previous audited accounts
- the approved budget for 2015;
- the Joint Trustees report for the period ended 30 September 2015; and
- Breakdown of facilities available and related counterparties.

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.

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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