Announcements Corporate Public Entities Rating Alerts

GCR affirms Delta State Government of Nigeria’s National Scale Rating at BBB+(NG); Outlook Stable

Lagos, 30 October, 2018 — Global Credit Ratings has affirmed the long term national scale rating assigned to Delta State Government of Nigeria at BBB+(NG), with the outlook accorded as Stable. The long term issuer rating is valid until September 2019.

Concurrently, the rating assigned to the Tranche 1 N50bn Fixed Rate Bond has expired and has been withdrawn, following the full settlement of principal and interest obligation on the bond, upon maturity in September, 2018.

RATING RATIONALE

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

Delta State is one of the largest economies in Nigeria, supported by the vast crude oil and natural gas deposits found in the State. Although, its finances are closely correlated to fluctuations in crude oil production and global prices, the presence of businesses in the area has supported the Sate’s productivity and ability to sustain diverse internal economic activity. Despite this, consecutive declines saw revenue nearly half by FY16, but the impact of higher crude oil prices led to a rebound in FY17 and an annualised 47% growth to June 2018 (“1H FY18”). Although revenue targets were achieved, statutory receipts still account for over 75% of revenue, highlighting the susceptibility to unpredictable oil prices. Programmes being implemented to diversify the revenue base and raise Internally Generated Revenue (“IGR”) have yielded few tangible benefits.

The State continues to evidence a very high expense base, relating mainly to consumptive expenditure items, with high staff costs of particular concern. Thus, recurrent expenditure spiked 32% and constrained the operating surplus. However, the State anticipates that higher surpluses over the medium term will be driven by a combination of robust income growth and cost containment, which will free up cash for capex developments.

The sharp decline in revenue impacted the State’s capacity to execute major infrastructural development over recent years. Despite the higher revenue in FY17, capex remained low at N44.4bn (33% of budget), as anticipated borrowings to augment the low surplus were not forthcoming. The inability to attain targets could widen the infrastructural deficiency further, placing the State at risk of falling behind in its plan to rapidly industrialise and open up the economy to investments. As a consequence of the low surpluses, the elevated debt profile reflects increased reliance on borrowings to fund infrastructural projects. Although, borrowings reduced by 7% to N127.7bn, it comprised a significant 45% of funding at FY17. Debt protection metrics appear to have strengthened on the back of the growth in revenue, as the gross debt to revenue tapered to 64% (FY16: 97%), while net debt to revenue declined to 54%, underpinning the stronger cash generation in FY17. Moreover, about 77% of debt comprises Federal Government of Nigeria loans on concessionary terms, affording the State some funding stability.

Both principal and interest on the N50bn Series 1 Fixed Rate Bond were fully settled upon maturity in September, 2018. Accordingly, the rating accorded to the Bond has been withdrawn.

Positive rating action is premised on sustained long term growth and diversification in revenue, and in particular IGR. If costs are well maintained, this should leading to larger surpluses, translating to improved infrastructural development, supporting further economic expansions. In contrast, factors that result in a deterioration of gearing and credit protection metrics, including weaker earnings of higher debt, could result in a downgrade. Weaker earnings would also signal that development efforts are not successful and thus, negatively viewed.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Kunle Ogundijo
Lagos
+23 41 462 2545
kunle@globalratings.net

Committee Chairperson
Dave King
Chairman
king@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Public Entities, updated February 2018
Delta State Government Rating Reports (2011 – 2017)
Glossary of Terms/Ratios (February 2018)

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 process was influenced by any other business activities of the credit rating agency; b.) the rating is 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 rating is valid until September 2019.

Delta 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 has been disclosed to Delta State with no contestation of the rating.

The information received from Delta State Government of Nigeria and other reliable third parties to accord the credit rating included:
 the audited accounts for the year ended 31 December 2017 (plus four years of audited comparative numbers);
 approved budget for 2018;
 the Joint Trustees report for the period ended 30 September 2018;
 the budget performance report as at 30 September 2018.

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

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