GCR affirms Delta State Government of Nigeria’s National Scale Rating at A-(NG); Outlook Negative

16 Dec 2016 In Rating Notifications

GCR affirms Delta State Government of Nigeria’s National Scale Rating at A-(NG); Outlook Negative

Lagos, 16 December 2016—Global Credit Ratings has affirmed the long term national scale rating assigned to Delta State Government of Nigeria at A-(NG), with the outlook accorded as Negative. Concurrently, the national scale rating accorded to the Tranche 1 N50bn 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 2017.

RATING RATIONALE

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

The precipitous fall in the global price of crude oil has led to consecutive declines in statutory receipts. In this regard, after reducing from around N220bn between F11 and F13, statutory receipts declined to N192.7bn in F14 and by a greater N61bn to N131.6bn in F15. As a result, total revenue declined to N235.3bn and N184.1bn in F14 and F15 respectively, albeit the F15 figure was in line with budget. As Delta State ranks as one of the major oil producing States, a large part of its revenue is directly linked to activities in the oil industry. Thus, its finances are particularly susceptible to the variability in global oil prices, as was evidenced by the sharp decline in F15.

Positively, Internally Generated Revenue (“IGR”) increased by N10.4bn to a period high N53bn in F15, providing tentative evidence of growth in other sources of revenue. This increase was mainly attributed to a 27% jump in tax revenue to a high N49.2bn and reflects the positive results of efforts to stimulate economic activity.

Despite the decline in revenue, expenditure level remained high, rising by 8% to N153.3bn. While expenditure averaged 62% of total revenue (F11-F15), it accounted for a higher 83% in F15, evidencing the significant utilisation of revenue for consumptive purposes. Specifically, staff costs rose to N67.9bn in F15, equating to 44% of expenditure (F14: 48%). The persistently high level of personnel expenses is of concern, and could further constrain the State’s financial flexibility, with a ratio around 35% deemed more appropriate by Global Credit Rating Co. (“GCR”). As a consequence, there was a much reduced operating surplus of N30.8bn (F14: N93.9bn).

Capital expenditure fell to a period low N52.4bn (F14: N112.1bn), attributed to the low operating surplus, exacerbated by lower than expected grants and other capital receipts. Although progress is noted, the infrastructural deficit persists, with the government required to seek alternative funding sources to ensure that industrialisation/diversification targets are attained over the medium term.

The State reported a N9.2bn rise in total debt to N120bn at FYE15, the bulk of which comprised Federal Government of Nigeria (“FGN”) bonds at N69.6bn (58% of total borrowings). The high gross quantum is cause for concern, but this is mitigated by the concessionary terms offered by the FGN facilities, while gross and net debt to total revenue ratios of 65% and 51% respectively (FYE14: 47% and 33%) appear moderate. Furthermore, on the back of higher expenses, cash holdings declined by N7.2bn to N25.6bn at FYE15, with days cash on hand declining to 61 days (F14: 85), well below the GCR benchmark of 90 days. If pension funds were stripped out of cash, days cash on hand would register an even lower 38 days (F14: 59 days).

The Tranche 1 N50bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order (“ISPO”) approved by FGN, covering both the interest cost and principal redemption. As a result of this credit support, the bond has been accorded a two-notch rating uplift relative to the issuer rating. Further to this, 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.

Positive rating action is unlikely in the short term given the current challenging operating environment as the decline in crude oil receipts suggests lower statutory transfers to States will persist. In contrast, revenue underperformance combined with higher than expected debt could place Delta State’s ratings under pressure.


NATIONAL SCALE RATINGS HISTORY

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
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities (updated February 2016)
Delta State Government Rating Reports (2011 – 2015)
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 ratings are valid until November 2017.

Delta 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 Delta State with no contestation of the ratings.

The information received from Delta State Government of Nigeria and other reliable third parties to accord the credit rating included:
 the unaudited accounts for the year ended 31 December 2015 (plus four years of comparative numbers);
 the budget for 2016;
 the Joint Trustees report for the period ended 30 September 2016; and
 the draft accounts for the six-month period ended 30 June 2016.

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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