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

10 Dec 2015 In Rating Notifications

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

Lagos, 10 December 2015—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 2016.

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:

Total income only improved marginally to N45.7bn in F14 (56% of budget), resulting mainly from an increase in Internally Generated Revenue (“IGR”) to N9.9bn. This was attributed to improved collections from fines and fees. While the impact of the sustained slump in oil price appeared minimal in F14, the effect is likely to be more severe in F15 and beyond as the price has fallen below even the reduced Federal Governments benchmark. Ondo remains significantly dependent on the Federal Government for financial sustenance (77% of income in F14), making it highly susceptible to any reduction.

In line with the cost rationalisation measures being implemented, total recurrent expenditure declined by N7.8bn to N58.4bn in F14, arising largely from the 46% decrease in consolidated revenue fund charges to N6.6bn. While government spend in the provision of essential services to the residents (under transfers and subventions to parastatals and other government agencies) also declined by N2.4bn to N16.1bn, personnel costs have remained high and inhibitive, consuming 73% of income in F13 and 71% in F14. As a consequence, the State will need to reduce emoluments and/or staff numbers in order to reduce financial strain and ensure funds are more productively used for development projects

Gross debt remained at N30bn at FYE14, with the gross debt to income ratio moderate at 66% (FYE13: 69%). However, higher cash utilisation saw the net debt to income ratio rise to 40% at FYE14 (FYE13: 26%), while cash on hand fell to 75 days (F13: 112 days). Whilst the State has not, to date, evidenced any debt serviceability strain, this may arise if statutory receipts were to decline. Offsetting this risk somewhat, the State will likely be a beneficiary of the Federal Government of Nigeria (“FGN”) debt restructuring programme, which will effectively extend the maturities of certain State debt obligations for 15-20 years, thereby reducing annual debt service costs.

The Tranche 1 N27bn Fixed Rate Bond is 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 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 large negative impact that the fall in global oil prices has had on the FGN’s finances and those of Ondo 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 well due to a material rise in interest-bearing debt levels relative to income. 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
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities (updated February 2015)
Ondo State Government Rating Reports (2011 – 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 October 2016.

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
- four years of previous audited accounts
- the approved budget for 2015;
- the Joint Trustees report for the period ended 30 September 2015; and
- the management accounts for the six-month period ended 30 June 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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