Lagos, 31 December 2019 — 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 actions were 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 2020.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Gombe State Government of Nigeria (“Gombe State” or “the State”) based on the following key criteria:
Gombe State is predominantly agrarian (crop and livestock), with all year round crop production supported by the existence of three large dams for irrigation. Nevertheless, it ability to stimulate economic activity and sustainable income levels remains hampered by lack of adequate social and commercial infrastructure required to enhance output volumes and the quality of produce through mechanisation.
Underpinned by a substantial increase in statutory allocation and other special transfers arising from the stability of oil production and higher global oil price, Gombe State’s total revenue increased to a period high N73.8bn in FY18 (FY14-17 average: N53.7bn). Although, this indicates the State’s strong access to external support funding to augment its weak internally generated revenue (of 18.2% of total revenue in FY18), it also exhibits significant exposure to the vagaries of the crude oil market.
Total recurrent expenditure rose by 16.7% to N47.5bn in FY18, reflecting an expansion of the administrative functions of the State. The growth was largely driven by staff costs and overheads, which saw the expense ratio register at 64%, partly constraining the operating surplus. To boost its internally generated revenue, the State has initiated a revenue optimisation programme, establishing a separate entity to hold, manage and control all revenue generating assets of the State. Nevertheless, additional pressure on operating surplus could emanate if the increase in national minimum wage is implemented.
Debt service metrics remain elevated, placing pressure on the ratings. Despite debt having moderated to N55.1bn at FY18 (FY17: N61.2bn), the debt to income ratio remained high at 74.8% at FY18 (5-years average of 81.4%). Moreover, gearing is expected to escalate as the State intends to raise a further N8.2bn through a new bond issuance,
Positively, strong financial backing for Gombe State from the Federal Government of Nigeria (”FGN”) has been evidenced through various concessionary facilities. Thus, over half of the current debt comprises FGN’s support, with long tenors and concessional interest rates, affording the State some funding flexibility. The State has also accessed commercial bank debt and bond issuances, with an extension of the Programme 1, Series 1 Bond maturity. These funds have been utilised to provide social services and meet capex and operating requirements.
The existing Bond Issues (N20bn and N5bn) are secured by an Irrevocable Standing Payment Order (ISPO) approved by the FGN, covering both the interest costs and principal redemptions. As a result, a three-notch rating uplift has been assigned to the Bond Issues relative to the Issuer rating.
Positive rating migration is unlikely in the short term given the current low Internally Generated Revenue, underlying the State’s inability to sustainably grow and diversify revenue streams. This leaves little headroom to absorb shocks caused by potential oil price volatility. The ratings may, however, come under pressure in the event of a decrease in income from the FGN, and/or an increase in debt, which would weaken debt service.
NATIONAL SCALE RATINGS HISTORY
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
Gombe State Government Rating Reports (2012 – 2018)
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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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 2020.
Gombe State Government of Nigeria 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 Government of Nigeria.
The information received from Gombe State Government of Nigeria and other reliable third parties to accord the credit rating included:
– audited accounts for the year ended 31 December 2018 (plus four years of audited financial statements);
– 6-months management accounts to 30 June 2019;
– a breakdown of debt facilities available and related counterparties;
– approved budget for 2019 and
– the most recent Trustees’ reports on the bonds as at 30 September 2019.
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.