Lagos, 30 November 2018 — Global Credit Ratings has affirmed the long term national scale rating assigned to Gombe State Government of Nigeria at BBB-(NG), with the outlook accorded as Stable. Concurrently, the following rating action was taken:
• The national scale rating assigned to the N20bn Programme 1 Series 1 Fixed Rate Bond was affirmed at A-(NG), with the outlook accorded as Stable.
• The national scale rating assigned to the N5bn Programme 2 Series 1 Fixed Rate Bond was affirmed at A-(NG), with the outlook accorded as Stable.
The long term issuer and bond ratings are valid until October 2019.
Global Credit Ratings has accorded the above credit ratings to Gombe State Government of Nigeria (“Gombe State”) based on the following key criteria:
Although, a number of economic policies have been implemented to drive rapid industrialisation and diversify revenue streams, these programmes have yielded few tangible benefits, with revenue growth remaining weak, registering around the N50bn mark in the last seven years. This has been exacerbated by the significant dependence on oil price linked allocations from the Federal Government of Nigeria (“FGN”). While this source plays an important role in the funding structure, the unpredictability of earnings hampers financial planning, while also exposing a substantial funding gap, as has played out in the last few years.
The current expense base appears manageable (as recurring revenue was sufficient to cover costs). Nevertheless, higher staff costs and overheads saw the expense ratio expand to 69%, partly constraining the operating surplus in FY17. Nevertheless, a combination of robust income growth and cost rationalisation measures should drive growth in surpluses over the medium term, which will free up cash for capex developments.
As the operating surpluses have become insufficient to fund capex, the State has relied on borrowings to execute projects in order to reduce the infrastructural deficit. As a consequence, total debt has rapidly risen from a low N21.6bn at FY13 to N61.2bn at FY17, placing substantial debt service pressure on the State. In this regard, debt service metrics have deteriorated, with the debt to income rising to a high 104% (FY16: 84%), while the net debt to income rose to 90% (FY16: 75%), despite the stronger cash flow generated. FGN’s support is, however, positively considered with over half of debt now comprising the bail-out fund, budget support facility and special intervention programme on education. These borrowings have long tenors and concessional interest rates, affording the State some funding flexibility.
Added to this, the extension of maturity of the Series 1 bond by four years to 2023, has served to ease debt service obligations
The Bond Issues (N20bn and N5bn) are 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 bonds have been accorded a three-notch rating uplift relative to the issuer rating. 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.
Positive rating action is unlikely in the short term given the current low revenue, underlying the State’s inability to sustainably grow Internally Generated Revenue (“IGR”) and diversify revenue streams. This leaves little headroom to absorb earnings shocks. In contrast, the ratings may come under pressure in the event of a decrease in revenue, requiring additional debt to finance activities, leaving the State with higher than anticipated debt level, thus weakening both debt service and credit protection metrics.
NATIONAL SCALE RATINGS HISTORY
+23 41 904 9462
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
Gombe State Government Rating Reports (2012 – 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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until October 2019.
Gombe 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 ratings have been disclosed to Gombe State.
The information received from Gombe 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 financial statements);
– a breakdown of debt facilities available and related counterparties;
– approved budget for 2018 and
– the most recent Trustees’ reports on the bonds as at September 30, 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.