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

31 Oct 2016 In Rating Notifications

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

Lagos, 31 October 2016—Global Credit Ratings has affirmed the long term national scale rating assigned to Niger State Government of Nigeria at BBB-(NG), with the outlook accorded as Negative. Concurrently, the national scale rating accorded to the Tranche 1 N9bn Fixed Rate Bond was also affirmed at A-(NG), with the outlook accorded as Negative.

The long term issuer and bond ratings are valid until September 2017.

RATING RATIONALE

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

The impact of Federal Government of Nigeria’s (“FGN”) diminished financial position and by extension its capacity to support State Governments through statutory allocations was clearly evidenced in F15. In this vein, Niger State reported a 21% decline in total income to a period low N43.4bn in F15 (68% of budget), attributed to a reduction in statutory receipts to a five-year low of N33.3bn (F14: N43.9bn). The economic environment also affected Internally Generated Revenue (“IGR”), which declined by around N1bn to N10.1bn in F15. This was attributed to a decrease in other IGR sources to N5.1bn (F14: N7bn), as income sources such as fines and fees, licences, sales and rent totalled a significantly lower N264m from N1.2bn in F14. Nevertheless, the sustained increase in tax income to a new high of N4.8bn (F14: 3.5bn) is positively noted.

Arising from cost rationalisation measures being implemented (key amongst which, is the alignment of expenditure with current income levels), the State was able to reduce recurrent expenditure by N2.5bn to N43.9bn in F15. This was spurred by 28% decrease in personnel costs to N8.3bn, as staff allowances were cut. Nevertheless, income was insufficient to cover expenses and a deficit of N458m was reported in F15 (the first over the review period). In order to meet obligations, the State received N6.9bn from the FGN in form of soft loans. Furthermore, capex slumped to a period low of N6.9bn in F15 (F14: N27.3bn), 27% of budget, attributed to much lower grant income and the lack of fiscal surplus. This could halt the progress made under the infrastructural development programme and impede its long term objectives.

Gross debt remained flat around N28bn at FYE15, as repayments on existing obligations offset new loans drawn. Nevertheless, as a result of weaker income, the gross debt to income ratio increased to 65% at FYE15 (FYE14: 54%), and net debt to income to 52% (FYE14: 38%). Cash and equivalents reduced by N1.4bn to N5.6bn at FYE15, underlying the greater utilisation of cash resources to fund obligations. As a consequence, cash on hand declined to 46 days (F14: 55 days), remaining well below GCR’s 90 days benchmark.

The finances of many States (including Niger) 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, the FGN established a new N90bn credit facility, which is being accessed by States who meet the 22 stringent conditions.

The Tranche 1 N9bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order (“ISPO”) approved by the FGN, covering both the interest and principal redemption. As at the end of September, 2016, there was an accrual of N1.1bn in the sinking fund account. As a result, a three notch rating uplift is considered appropriate for the bond Issue.

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 State would persist. Conversely, the ratings may come under further pressure if statutory income falls further, thus negatively impacting total income and leading to further deficits. This would negatively impact cash flows (and funds available for capex), and place increasing pressure on liquidity metrics.

NATIONAL SCALE RATINGS HISTORY

Initial Rating (June 2011)
Issuer rating: BBB(NG)
Outlook: Stable
N9bn Tranche 1 Fixed Rate Bond: A-(NG)  (June 2011)
Outlook: Stable

Last Rating (September 2015)
Issuer rating: BBB-(NG)
Outlook: Negative
N9bn Tranche 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 2016)
Niger 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 September 2017.

Niger 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 ratings have been disclosed to Niger State with no contestation of the ratings

The information received from Niger State and other reliable third parties to accord the credit rating(s) included
-the audited accounts for the year ended December 31 2015, plus four years of comparative numbers,
-approved 2016 budget.
-joint trustees’ report on the 9bn Tranche 1 Bond.
-a breakdown of facilities available and related counterparties, and
-information specific to the rated entity and/or industry was also received.

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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