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

17 Nov 2016 In Rating Notifications

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

Lagos, 17 November 2016—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 10/2017.


RATING RATIONALE

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

Resulting from dwindling oil revenues, which has weakened the financial position of the Federal Government of Nigeria (“FGN”), statutory receipts decreased to N30.4bn in F15 (F14: N42.6bn). As a result, total income decline by 25% to N39bn in F15. Notwithstanding the substantial decrease, statutory receipts accounted for a high 78% of total revenue (F14: 82%), highlighting the almost complete dependence of the state’s finances on the FGN. Internally Generated Revenue (“IGR”) also reduced by N1.1bn to N8.6bn, mainly attributed to a decrease in tax income and non-recurring IGR sources, owing to the sluggish economy.

Cost rationalisation measures led to a N5.7bn decrease in recurrent expenditure to N36.7bn in F15, underpinned by reduced personnel and overhead costs. Nevertheless, GCR deems the high cost base (particularly staff costs) to be prohibitive, constraining the State’s financial flexibility and impacting its ability to provide service delivery and rollout/upgrade infrastructure. Notwithstanding the high cost base, Gombe State has consistently reported operating surpluses over the review period, underpinned by statutory receipts. However, with the significant decline in revenue reported in F15, the operating surplus fell to N2.3bn from N9.9bn in F14 (well below the high N21.3bn reported F12). This translated to a small 5.8% operating margin (F14: 18.9%). The decline in the operating surplus, coupled with low capital receipts also affected capex, which registered at a period low N14.4bn in F15 (F14: N31.4bn),

In a bid to sustain infrastructure spend, a number of new loans were obtained during F15, with total debt rising to N44.6bn at FYE15 (FYE14: N33bn). Of this, internal loans registered at a high N36.8bn/82% of debt (FYE14: N25.3bn/77%), with the bulk of new debt raised relating to FGN loans (four in number) amounting to N14.5bn/33% of total loans. These loans (including the CBN bail-out funds and special intervention programme on education) were obtained at concessional interest rates (to be utilised for specific capex projects), and are to be repaid over the long term. Outstanding commercial loans (three in number) rose by a net N2.1bn to N3.8bn at FYE15. As such, gross and net debt to revenue levels increased to 115% and 86% at FYE15 respectively (FYE14: 63% and 60%), above historical levels and well above what is reported by other States. High debt levels could impact the ratings, going forward.

The finances of many States (including Gombe) have been severely impacted by the decline in statutory receipts, worsened by their low levels of IGR and high expense ratio. In order to reduce the current strain, in June 2016 the FGN established a new budget support facility (long tenor, low interest borrowing), which is currently being accessed by States on a monthly basis. Gombe State received about N4.8bn between July and October 2016 (averaging monthly receipts of N1.2bn), and this has been utilised to fund both capex and recurrent expenditure.

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. 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 weak crude oil receipts suggests lower statutory transfers to States could persist in the short term. In contrast, the ratings may come under further pressure in the event of a continuous decrease in statutory income and thus total income, leading to further deficits; as this would negatively impact cash flows (and funds available for capex), placing increasing pressure on liquidity metrics.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Kunle Ogundijo
Analyst
Lagos
+23 41 462 2545
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Committee Chairperson
Dave King
Chairman
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities (updated February 2016)
Gombe State Government Rating Reports (2012 – 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 October 2017.

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 2015 (plus four years of audited financial statements);
- a breakdown of debt facilities available and related counterparties;
- approved budget for 2016 and
- the most recent Trustees’ reports on the bonds as at September 30, 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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