GCR downgrades Nasarawa State Govt. of Nigeria’s National Scale Rating to BB+(NG); Outlook Negative

07 Dec 2016 In Rating Notifications

GCR downgrades Nasarawa State Govt. of Nigeria’s National Scale Rating to BB+(NG); Outlook Negative

Lagos, 7 December 2016—Global Credit Ratings has downgraded the long term national scale rating assigned to Nasarawa State Government of Nigeria to BB+(NG), with the outlook accorded as Negative. Concurrently, the national scale rating accorded to the Tranche 1: N5bn Fixed Rate Bond was also downgraded to BBB+(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 Nasarawa State Government of Nigeria (“Nasarawa State or the State”) based on the following key criteria:

The impact of the sustained slump in global crude oil prices was evident in Nasarawa State’s reduced finances, as statutory receipts almost halved to a period low N27.2bn in F15. The more severe decline in statutory receipts (compared to other States) was worsened by a change in the accounting treatment for VAT receipts. In previous years VAT was accounted under the income statement and utilised to fund recurrent expenditure, but in F15, it was reported under Capital Development Fund (like most States). As a result of the State’s significant dependence on statutory receipts for financial sustainability (which has averaged 90% over the last five years), Nasarawa reported a 40% decline in total income to a period low N31.5bn in F15.

The State reported a 5% growth in Internally Generated Revenue (“IGR”) to N4.3bn in F15, albeit this falls well below the high N5.8bn reported in F13 and grossly insufficient to fund operations internally. Growth was largely underpinned by a marginal increase in tax income, which edged higher to N3.8bn (F14: N3.7bn).

In line with the fall in income, total recurrent expenditure decreased by 35% to N28.5bn in F15, as the State lacked the resources to fund its activities. While significant cost reductions were achieved in overhead costs, personnel costs remained high accounting for 65% of expenditure and 59% of total income. Given this, the State will need to reduce staff numbers or allowances to free up more funds for more productive ventures, with a level of around 35% deemed more appropriate. However, this may prove politically difficult.

The State has been able to keep debt profile around the N12bn mark over the review period, with total debt rising by a net N742m to N12.9bn at FYE15. Combined with the decline in income, gross debt to income registered somewhat higher at 41% (FYE14: 23%), while net debt to income rose to 29% from 5% at FYE14. With debt rising to N18.6bn at 1H F16, the gross debt to income ratio rose further to an annualised 66%. While gross debt does not appear onerous, the State reports substantial creditor’s liabilities of N25.7bn (owed contractors for projects executed) and N7.2bn pension and gratuity to retirees, which need to be paid. Settling these amounts will require funds to be diverted from current expenditure, failing which service providers are unlikely to engage with the State further, thus affecting service delivery and capex projects. The need to utilise cash resources to fund expenditure, saw cash holdings decline to N3.7bn (five-year low) at FYE15 (FYE14: N9.4bn).

A negative view is taken of the State’s poor and inadequate accounting and internal control system, with the financial statements having not been unaudited since 2013.

The Tranche 1: N5bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order approved by the Federal Government of Nigeria (“FGN”), covering both the interest cost and principal redemption. According to the trustees, as at September 2016 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.

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

Criteria for Rating Public Entities (updated February 2016)
Nasarawa State Government Rating Reports (2013 – 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.

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:
• the 2015 unaudited financial statements (plus four years of comparative numbers),
• the 2015 budgeted financial statements,
• breakdown of facilities available and related counterparties,
• trustees’ report as at September 30, 2016,
• draft accounts for the six months to June 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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