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

29 Nov 2016 In Rating Notifications

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

Lagos, 29 November 2016—Global Credit Ratings has affirmed the long term national scale rating assigned to Ondo State Government of Nigeria at BBB-(NG), with the outlook accorded as Negative. Concurrently, the national scale rating accorded to the Tranche 1 N27bn 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 October 2017.

RATING RATIONALE

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

In contrast to most States that reported declines in income in F15 (stemming from sustained slump in global crude oil prices), Ondo State reported a 10% increase in total income to N50.7bn in F15. Growth was largely underpinned by a N5.2bn rise in statutory receipts to N41.1bn in F15, as the State benefitted from increased allocations. With statutory receipts having averaged 79% of total income over the last five years (F15: 81%), the State continues to display a high dependence on federal allocations, as measures to increase non-oil revenues have yielded little benefits thus far. Furthermore, the impact of weaker economic activity also reduced Internally Generated Revenue (“IGR”) to N9.6bn in F15 (F14: N10.1bn). Of concern is the second decline in income tax receipts to N5bn (F14: N5.8bn), as it comprises a more reliable and stable source of income, accounting for more than half of IGR through the period.

The continued implementation of cost rationalisation measures in F15 resulted in a further decline in recurrent expenditure to N47.6bn (F14: N48.4bn). Much of this decline derived from a N4.4bn reduction in personnel costs to N28.2bn. While the ratio of staff costs to recurrent expenditure reduced to 59% in F15 (F14: 67%), it has registered well above GCR’s 35% benchmark for sustainable operations throughout the review period. Accordingly, it is critical that staff costs are reduced to afford the State more financial flexibility and enable it to invest more funds in productive ventures.

Total debt rose by N4.8bn to N51.1bn at FYE15, with gross and net debt to income ratios largely unchanged at 101% and 76% respectively. However, N13.5bn in new loans were drawn from the Federal Government of Nigeria (“FGN”), which were primarily used to refinance commercial loans on more favourable terms. The FGN loans carry a concessionary interest rate of around 9% and have a tenor of between 15 and 20 years. This has helped reduce current debt servicing obligations, thereby freeing up funds for development. In addition, due to a lower expenditure, cash holdings increased marginally to N12.6bn at FYE15, from N12bn at FYE14, with the days cash on hand rising to 97 days (F14: 90 days).

Ondo State has accessed the budget support facility (long tenor, low interest borrowing) established by the FGN in June 2016. The State has received over N4bn from the support facility, which has been utilised to fund capex and recurrent expenditure.

The Tranche 1 N27bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order approved by the FGN, covering both the interest cost and principal redemption. As a result of this credit support, the bond has been accorded a three-notch rating uplift relative to the issuer rating.

Positive rating action is unlikely in the short term, given the current challenging operating environment. In contrast, the ratings could come under further pressure in the event of a decrease in statutory income and thus total income; as this would negatively impact cash flows.

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)
Ondo 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 October 2017.

Ondo 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 Ondo State with no contestation of the ratings.

The information received from Ondo 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);
• the unaudited six months account as at 30 September, 2016;
• a breakdown of debt facilities available and related counterparties;
• approved budget for 2016; and
• the most recent Trustees’ reports on the bond 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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