GCR assigns Cross River State Govt. of Nigeria a National Scale Rating of BBB(NG); Outlook Stable

12 Dec 2014 In Rating Notifications

GCR assigns Cross River State Govt. of Nigeria a National Scale Rating of BBB(NG); Outlook Stable

Lagos, 12 December 2014—Global Credit Ratings has assigned the Cross River State Government of Nigeria a first time long term national scale rating of BBB(NG), with the outlook accorded as Stable. Concurrently, the proposed N31.95bn Series 1 Fixed Rate Bond has been assigned a rating of A-(NG), with the outlook accorded as Stable.  The long term issuer and bond ratings are valid until 10/2015.

RATING RATIONALE

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

Total income has remained around the N58bn level since F11, albeit decreasing slightly due to lower statutory receipts. The decrease in revenue from the federation account was attributed to the State’s loss of its designation as an oil producing State, and accordingly the 13% derivation fee payable to such States. Positively, Internally Generated Receipts (“IGR”) rose by a cumulative 79% to N12.7bn from F09 to F12, before declining marginally to N12bn in F13. While growth has been driven by income tax collections, other sources of income sustained IGR in F13 as income tax collections decreased. Positively, 1H F14 results indicate an improved IGR, 93% of the annualised F14 budget. Notwithstanding this, the statutory allocation has comprised the bulk of receipts, averaging 79% of total revenue over the 5 year review period. Thus, the drop in the oil price during 2H 2014, and the expectations for sustained lower prices, may prejudice future statutory receipts going forward, given that they are dependent on oil prices.

Personnel costs have almost doubled over the review period and accounted for 49% of recurrent expenditure in F12 and 53% in F13, well above GCR benchmark for sustainable expenditure of 35%. The State attributed this to a substantial increase in the Federal Government’s minimum wage in 2012. Nevertheless, such high expenditure does constrain the State’s financial flexibility and its ability to deliver on capex projects. Although, this has driven a sharp increase in recurrent expenditure, total expenses have registered well below the State’s income level, resulting in strong operating surpluses.

The State evidences an increasingly elevated debt profile, as total debt has risen by a cumulative N40.6bn over the review period, to N59.4bn at FYE13. Thus, the gross debt to income ratio rose from 60% at FYE09 to 106% at FYE13 (FYE12: 75%), while net debt to income ratio spiked to 89% at FYE13 (FYE12: 52%). Furthermore, the proposed N31.95bn bond issue will be used to refinance debt, which should allow for greater funding flexibility. However, gross and net debt ratios are only expected to decrease gradually over the medium term in line with repayments, and if income growth is not achieved, the State will remain in a high debt position.

The proposed N31.95bn Series 1 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, a two notch rating uplift is considered appropriate for the bond Issue.

Positive rating action may derive from consistent improvement in IGR collection to a sustainable level that adequately covers recurrent expenditure. The demonstrated ability to generate additional income from ongoing projects over the medium term would also be positively viewed. Conversely, the ratings may come under pressure in the event of a significant decrease in total income and/or a greater than anticipated rise in recurrent expenditure. This would negatively impact cash flows (and funds available for capex), and place increasing pressure on liquidity metrics. In addition, if debt levels exceed the forecast band, negative rating action may be considered.


NATIONAL SCALE RATINGS HISTORY

First time rating

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 April 2014)
Glossary of Terms/Ratios (February 2014)


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 10/2015.

Cross River State participated in the rating process via face-to-face meeting, 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 Cross River State with no contestation of the ratings.

The information received from Cross River State Government of Nigeria and other reliable third parties to accord the credit rating included the latest available audited annual financial statements as at December 31, 2013 (plus four years of comparative numbers), management accounts as at June 30, 2014, 7-year budgets underlying the tenor of the proposed bond Issue, a breakdown of facilities available and related counterparties, as well as final drafts of transaction documents, including, Shelf Prospectus, Pricing Supplement, Programme Trust Deed etc. In addition, 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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