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

01 Dec 2015 In Rating Notifications

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

Lagos, 30 November 2015—Global Credit Ratings has affirmed the long term national scale rating assigned to Gombe State Government of Nigeria at BBB-(NG), with the outlook accorded as Negative. Concurrently, the following rating action was taken:

  • The national scale rating assigned to the N20bn Programme 1 Series 1 Fixed Rate Bond was affirmed at A-(NG), with the outlook accorded as Negative.
  • The national scale rating assigned to the N5bn Programme 2 Series 1 Fixed Rate Bond was affirmed at A-(NG), with the outlook accorded as Negative.

The long term issuer and bond ratings are valid until 11/2016.

RATING RATIONALE

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

Total revenue decreased by 8% to N52.3bn in F14, underpinned by lower statutory receipts and Internally Generated Revenue (“IGR”). The fall in the statutory allocation followed the sustained slump in the global oil price, with the allocation registering at a lower N42.6bn in F14 (F13: N45.1bn), while the fall in IGR to N9.7bn (F14: N11.9bn) was attributed to a decrease in both tax income and non-recurring internally generated revenue (“IGR”) sources. In contrast, the State’s recurring expenditure has consistently risen, and reached a high of N42.4bn in F14 (F13: N37.2bn), translating to a five-year compound annual growth rate (“CAGR”) of 13%. This has been underpinned by the high and inhibitive level of staff costs, which accounted for around half of recurring expenses in F14.

Although the State remains heavily dependent on the Federal Government of Nigeria (“FGN”) for financial sustenance, as its IGR remains insufficient to cover its recurrent expenditure, it has consistently reported operating surpluses over the review period. However, with expenditure growth outpacing revenue growth in recent years, the operating surplus diminished to N9.9bn in F14, being well below surpluses in excess of N20bn that were reported in F11 and F12. This translated to a lower, albeit still robust operating margin of 18.9% in F14, from 34.7% in F13, constraining the State’s ability to fund capex internally and underpinning higher borrowings since FYE11. Notwithstanding this, slightly lower debt service payments of N9.6bn were made in F14 (F13: N10.8bn), the bulk of the which related to bank loans and principal payment on the N20bn fixed rate bond, while the remainder related to interest payments. Given the weaker earnings, the operating surplus covered debt service charge by a lower 1x in F14, from 1.8x in F13.

Debt increased by a net N4.1bn to N25.7bn at FYE14, following additional internal loans assumed during the year to fund development projects. Given the rise in debt and suppressed revenue, Gombe State reported higher gross and net debt to income levels of 49% and 46% respectively at FYE14 (FYE13: 38% and 20%); being well above the levels reported in preceding years, but still within acceptable industry norms. Although the State received the proceeds from the N5bn bond issued in 1Q F15, total debt is expected to reduce to around N21bn by FYE15. This would see the gross debt to income ratio reduce below the 40% level by FYE15. Furthermore, the sharp slump in cash to N1.7bn at FYE14 (FYE13: N10.1bn) has seen a marked reduction in liquidity, with the cash on hand reducing to 14 days at FYE14 (FYE13: 99 days); being well below GCR’s benchmark of 90 days.

The Bond Issues (N20bn and N5bn) are 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 bonds have been accorded a three-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.

The negative outlook accorded to the subnational sector as a whole (including Gombe State issuer and bond ratings) reflects GCR view of the current economic challenges facing the country, and in particular the negative impact that the fall in global oil prices has had on FGN’s finances and those of Gombe State. 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 that negatively impacts operating cash flows, as well as funds available for capex.

 

NATIONAL SCALE RATINGS HISTORY

Initial Rating (July 2012)
Issuer rating: BBB(NG)
Outlook: Stable

N20bn Programme 1 Series 1 Fixed Rate Bond: A-(NG)

Outlook: Stable

N5bn Programme 2 Series 1 Fixed Rate Bond: A-(NG) – (Initial rating in December 2014)

Outlook: Stable

 

Last Rating (May 2015)
Issuer rating: BBB-(NG)
Outlook: Negative

N20bn Programme 1 Series 1 Fixed Rate Bond: A-(NG)

Outlook: Negative

N5bn Programme 2 Series 1 Fixed Rate Bond: A-(NG)

Outlook: Negative

 

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 2015)

Gombe State Government Rating Reports (2012 – 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 11/2016.

Gombe State participated in the rating process 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 Gombe State with no contestation of the ratings

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

  • the unaudited accounts for the year ended 31 December 2014 (plus four years of audited financial statements);
  • the unaudited three months account as at 31 March, 2015;
  • a breakdown of debt facilities available and related counterparties;
  • five-year forecast provided during the bond issuance in 2014; and
  • the most recent Trustees’ reports on the bonds as at September 30, 2015.

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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