Global Credit Ratings has accorded the above credit rating(s) on Delta State Government of Nigeria based on the following key criteria:
Delta State Government of Nigeria (“the State”) is of significant strategic importance to the Nigerian economy, producing in excess of 30% of the country’s total oil output (and 70% of Delta State’s GDP). Given this, however, the State is exposed to limited revenue diversity. As such, the State has implemented a 10 year revenue diversity plan (inaugurated in 2008) known as Delta Vision 2020, with a key focus on the development of an economically competitive manufacturing sector. To achieve this, the State has been authorised to issue bonds up to a total of N100bn from the Nigerian capital market. The debt issuance programme will be continuously available to the State up to the limit of N100bn and for a period of 2 years (i.e the programme terminates in September 2013).
Delta State has reported relatively low levels of debt and manageable gearing over the review period (F11: 25%), albeit increasing in recent years. Going forward, however, the State is expected to issue the second tranche (of N50bn) pertaining to the aforementioned N100bn debt issuance programme. Accordingly, key gearing ratios are forecast to rise well above historic norms (to in excess of 40% in F12), and remain elevated in the medium term. Furthermore, key liquidity measures are deemed constrained and have evidenced a notable level of volatility over the review period (with the State utilising its bank overdraft to support operations in F10). In addition, cognisance is taken of contingent liabilities, as well as claims and litigation facing the State, which could see an erosion of cash holdings going forward.
Interest and coupon payments on the N50bn Fixed Rate Bond are secured by the ISPO issued by the FGN, which provides significant support to this bond rating. As at September 2012, a total of N11.4bn (two payments) had been paid timeously to bondholders. According to the Joint Trustees, there was an accretion of N38m in the sinking fund account as at 30th September, 2012.
In light of the political uncertainty in Nigeria, as well as the State’s significant reliance on federal income (F11: 86% of total income) to support operational requirements, a rating upgrade is unlikely in the short term. Cognisance should, however, be taken of the fact that the State’s ratings may come under pressure in the event of a downward revision in federally allocated funds, as this will negatively impact cash flows (given that internally generated funds do not fully cover recurring expenses), placing increasing pressure on already constrained liquidity metrics. Further, a higher than expected recourse to debt, as the remaining N50bn of the bond programme is expected to be issued over the next year.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Sep/2002)
Long term: A+(NG);
Outlook: Positive outlook
Last rating (Aug/2011)
Long term: A-(NG);
N50bn Series 1: Long term: A+(NG);
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria For Rating Public Entities
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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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, security or financial instrument.
Delta State Government of Nigeria participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Delta State Government of Nigeria and was amended following the provision of further material information by the entity.
The information received from Delta State Government of Nigeria and other reliable third parties to accord the credit rating included the latest audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, full year detailed budgeted financial statements, the N100bn debt issuance programme prospectus, claims litigation report, Joint trustees report, trustees performance report, irrevocable standing payment order issued by the Federal Government of Nigeria, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties.
With regards to the delayed release of the Delta State Government of Nigeria credit ratings, GCR required the provision and inspection of the audited annual financial accounts 2011, provided by management in April 2013.