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

15 Dec 2015 In Rating Notifications

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

Lagos, 15 December 2015—Global Credit Ratings has affirmed the long term national scale rating assigned to Nasarawa State Government of Nigeria at BBB-(NG), with the outlook accorded as Negative. Concurrently, the national scale rating accorded to the Tranche 1: N5bn 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 Nasarawa State Government of Nigeria (“Nasarawa State or the State”) based on the following key criteria:

Nasarawa State reported a 5% decline in income to N52.1bn in F14 (66% of budget), underpinned by declines to both statutory receipts and Internally Generated Revenue (“IGR”). With statutory receipts (including VAT receipts) having averaged 89% of income between F09 and F14, Nasarawa State displays significant reliance on the Federal Government of Nigeria (“FGN”) for fiscal support. Nevertheless, the sustained fall in oil prices had a relatively small impact on statutory receipts in F14, reducing by just N871m to N48bn (71% of budget). The full negative impact will, however, only be evident in F15 and F16.

Nasarawa has struggled to diversify its economic base due to poorly trained personnel (resulting in weak implementation of policies), low levels of disposable incomes amongst its residents, and inefficient debtors management. Accordingly, after reporting a robust increase IGR to N5.8bn in F13, IGR fell to a five-year low of N4.1bn in F14, whilst tax revenue has remained static.  IGR thus remains below that of other similarly sized States.

With the State scaling down expenditure in some areas, including a N7.8bn reduction in overhead costs, recurrent expenditure fell to N31bn in F14 (F13: N38bn). In contrast, staff emoluments spiked by 35% to a high N18.5bn, accounting for 60% of expenses in F14. Notwithstanding the increased staffing to productive sectors such as education and health, the financial drain that excessive staff costs is having on the State was reflected in reduction in expenditure on service delivery and related parastatals.

Nasarawa State has efficiently managed its debt profile over the last 6 years, with debt not having exceeded N12.5bn. In this regard, gross debt declined marginally to N12.2bn at FYE14, with the gross debt to income ratio slightly falling to 23.4%, while the net debt to income ratio was unchanged at 5%. Days cash on hand rose to 111 days (F13: 99 days), although this was bolstered by the lower expenditure during F14, rather than an increase in cash holdings or an improvement in other liquidity factors.

In addition to the restructuring of its commercial loans, in 3Q F15 Nasarawa received N8.3bn from the Central Bank of Nigeria (“CBN”) under a special intervention fund to help reduce the impact of low crude oil prices on income.

The Tranche 1: N5bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order (“ISPO”) approved by the FGN, covering both the interest cost and principal redemption. According to the trustees, as at September 2015 all transfers into the sinking fund were up to date and all payments to bond holders had been made. 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 substantial negative impact that the fall in global oil prices has had on FGN’s finances and those of Nasarawa 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 (negatively impacting operating cash flows). 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

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)
Nasarawa State Government Rating Reports (2013 – 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.

Nasarawa 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 Nasarawa State with no contestation of the ratings.

The information received from Nasarawa State Government of Nigeria and other reliable third parties to accord the credit rating included:
- unaudited accounts for the year ended 31 December
- four years of previous audited accounts
- management accounts for the four-month period ended 30 April, 2015
- the Joint Trustees report for the period ended 30 September 2015; and
- the approved budget for 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.


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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