Lagos, Nigeria, 04 May 2021 – GCR Ratings (“GCR”) affirms the national scale long-term Issuer rating of BB+(NG) with a Stable Outlook and assigns a national scale short-term Issuer rating of B(NG) to Gombe State Government. Concurrently, GCR has affirmed the national scale long-term Issue rating of BBB+(NG) assigned to the Programme 1 Series 1 and Programme 2 Series 1 Bond Issuances of Gombe State Government.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Gombe State Government of Nigeria||Long Term Issuer||National||BB+(NG)||Stable|
|Short Term Issuer||National||B(NG)|
|P1 Series 1 Fixed Rate Bonds||Long Term Issue||National||BBB+(NG)||Stable|
|P2 Series 2 Fixed Rate Bonds||Long Term Issue||National||BBB+(NG)||Stable|
The ratings of Gombe State Government of Nigeria (“Gombe State” or “the State”) are underpinned by the well-established State Government structure and ongoing funding support from the federal government of Nigeria. However, these are counterbalanced by elevated leverage and its relatively low internal earnings generating capacity due to its weak infrastructure base and undiversified nature.
Gombe State’s credit profile is limited by its predominantly agrarian nature, with agriculture being the largest contributor to Gross National Income and primary employer of labour. Moreover, the value chain necessary to transform the produce to finished product remains negligible reflecting low level of industrial capacity and the lack of diversification within the State’s economy. The weak social profile is also a ratings constraint as a sizable portion of the State’s population requires free service. 62.3% of the Gombe’s population live below the poverty line (National Bureau of Statistics 2019 poverty report), while 31.3% of its labour force remain unemployed as at Q4 2020 (National Bureau of Statistics Q4 2020 Unemployment and Underemployment report) trending above the national average of 40.1% and 27.2% respectively.,
Operating performance is moderately negative, due to the weak internally generated revenue (“IGR”) of the State, and the overdependence on federal allocations. However, note is taken of its moderate recurrent cost profile, with staff cost to total expenses ratio registering well within GCR prudential benchmark of 33%, creating headroom for developmental spending. However, the State’s recurrent cost profile is likely to come under pressure as it prepares to resume the payment of the new minimum wage, amid weak earnings. cognisance is taken of the various catalytic projects undertaken by the State to support economic activities and diversify earnings base to improve IGR. Nevertheless, GCR expects the State’s total recurring revenue to remain low, as the setbacks occasioned by the COVID-19 pandemic continue to constrain federal transfers and economic activities.
Management and Governance is a slight negative rating factor, reflecting the inconsistent timing of financial reporting and the low level of disclosure associated with the cash based financial reporting used by the State. Nevertheless, GCR notes that the Auditor General of the State has not flagged any major issues and a clean report has been issued in the last five years.
Gombe State’s high debt burden is negatively considered, with gross debt of N83bn at FY19 (FY18: 77bn). Net debt to total income has thus registered above 100% in most years, whilst operating cash flow coverage of gross debt has also come under pressure to register at 22% at FY19. Positively, the State reports diverse sources of funding, the majority of which relates to concessionary funding with long term maturity tenor and favourable interest rates, significantly reducing refinancing risk. The concessionary interest rate has supported a strong operating cash flow coverage of gross interest trending around the upper limit of the intermediate range of 3x-12x. However, the State is exposed to currency risk due to the increased utilisation of foreign debt, amid continuous devaluation of the Naira. GCR expects the debt coverage metrics to remain elevated over the rating horizon given the expectation for moderated revenue growth.
Gombe State evidences a moderate liquidity profile, with uses vs. sources liquidity coverage registering at 1.0x over a 12-month period, predicated on strong operating cash flow, which would comfortably cover planned capex spend. This is further supported by modest cash holding, translating to good cash coverage of 93 days. However, cognisance is taken of the State’s contractor and pension arrears, amounting to N19.4bn and N9.3bn as of September 2020, which could heighten liquidity pressure. GCR expects the uses vs sources ratio to remain around 1x over a 24-month period until the State scales up earnings generating capacity.
GCR has factored strong government support into the ratings for Gombe State, as it benefits from ongoing funding support from the Federal Government of Nigeria. The federal allocation is a monthly statutory transfer due to the State, payable by the federation accounts allocation committee. This is because the State fulfils a critical social service, being at the forefront of improving the day-to-day quality of life for its citizens. Moreover, the Federal Government has, in the past, provided bail out funding, when States income has fallen short of requirements, generally due to cushion against volatility at the international oil market.
Gombe State raised N20bn and N5bn under its Programme 1 and Programme 2 Bond Issuance in 2012 and 2015 respectively, with the proceeds utilised for financing the socio-economic projects. The bonds are fully backed by Irrevocable Standing Payment Order issued by the Federal Ministry of Finance of Nigeria. GCR has reviewed the Trustees bond performance reports in respect of the existing bonds and no breach was flagged. Accordingly, the Bond rating is derived by applying a three-notch uplift starting from the long-term rating of the Issuer. That said, any change in the rating assigned to the Issuer will directly affect the Bond rating.
Rating uplift is dependent on sustained growth in IGR and the diversification of sources of income, which will reduce the states reliance on the Federal Government and increase headroom to absorb earnings shocks. An improvement in gearing metrics would also be positive.
The rating may come under pressure if there is a further rise in debt profile without proportionate growth in revenue, resulting to substantial deterioration in the credit protection metrics. GCR may also reduce the support factor if there is evidence that the Federal Government has not assisted States in meeting their financial obligations.
|Primary analyst||Idris Oyekan||Analyst: Corporate Ratings|
|Lagos, Nigeria||Idris@GCRratings.com||+234 1 9049462|
|Secondary analyst||Eyal Shevel||Sector Head: Corporate and Municipal Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||Matthewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Local and Regional Governments, June 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, February 2021|
|Gombe State rating reports 2012-2018|
Gombe State Government
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||BBB(NG)||Stable Outlook||July 2012|
|Short Term Issuer||Initial||National||B(NG)||n.a.||May 2021|
|Long Term Issuer||Last||National||BB+(NG)||Stable Outlook||Dec 2020|
|Short Term Issuer||Last||National||B(NG)||n.a.||May 2021|
|P1 Series 1 Fixed Rate Bonds||Initial||National||A-(NG)||Stable Outlook||July 2012|
|P2 Series 2 Fixed Rate Bonds||Initial||National||A-(NG)||Stable Outlook||Dec 2014|
|P1 Series 1 Fixed Rate Bonds||Last||National||BBB+(NG)||Stable Outlook||Dec 2020|
|P2 Series 2 Fixed Rate Bonds||Last||National||BBB+(NG)||Stable Outlook||Dec 2020|
Risk Score Summary
|Rating Components and Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.25|
|Management and governance||(0.25)|
|Leverage & capital structure||(1.50)|
|Total Risk Score||5.25|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with because of holding the security or asset. For a company, its exposure may relate to a product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Gombe State Government. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Gombe State Government participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Gombe State Government and other reliable third parties to accord the credit ratings included:
- The audited financial results for the year ended 31 December 2019.
- Six-month management account up to 30 June 2020.
- Four years of comparative audited numbers.
- Approved revised budget for 2020.
- Debt facility details as of June 2020.