Lagos, 23 May 2019 — Global Credit Ratings has affirmed the long term national scale rating assigned to Lagos State Government of Nigeria (“Lagos” or “the State” or “Lagos State”) at A+(NG), with a ‘Rating Watch’ outlook accorded. Concurrently, a one-notch downgrade has been applied to the national scale ratings accorded to the following bond Issuances:
• Programme 2 Series 1 N80bn Fixed Rate Bond – A+(NG), Outlook: Rating Watch
• Programme 2 Series 2 N87.5bn Fixed Rate Bond – A+(NG), Outlook: Rating Watch
• Programme 3 Series 1 N47bn Fixed Rate Bond – A+(NG), Outlook: Rating Watch
• Programme 3 Series 2 N97.3bn Fixed Rate Bonds – A+(NG), Outlook: Rating Watch
The long term Issuer and bond ratings are valid until October 2019.
RATING RATIONALE OF THE ISSUER
The rating is supported by Lagos State’s position as the financial, commercial and industrial centre of Nigeria, accounting for c.30% of Nigeria’s Gross Domestic Product and over 50% of its industrial investments, foreign trade and commerce. Although Lagos has the most diversified revenue base in Nigeria, significant capital outlays are required to deliver required infrastructure, security and reduce unemployment.
However, the Rating Watch reflects GCR’s negative view of the incidents of non-compliance with the trust deeds in respect of timely transfer of funds in the Consolidated Debt Service Account to the respective sinking funds on Lagos’ bonds, as well as failing to honour an irrevocable standing payment order (“ISPO”) issued to a contractor. This has the potential for negative rating action should the non-compliance persist.
Lagos has a resilient revenue generation capacity underpinned by a strong IGR base that has averaged 86% of income over the review period. On the back of a recovery in the nation’s economy and ongoing reforms in revenue collection, total recurring income rose by N68.1bn to N481.4bn in FY17 and by 17% in FY18 (as per unaudited 12-months management accounts) but lagged budget by 33%.
Overall, recurrent expenditure (excluding public debt charges) increased by 14% to N234.7bn in FY17, underlying an increase in government running costs. Staff costs as a portion of expenditure declined to 39% in FY17 (FY16: 42%) and was maintained at the same level in FY18, albeit above GCR’s 35% benchmark for prudent costs. Internally Generated Revenue (“IGR”) has been sufficient to cover recurrent expenditure over the review period. Operating surplus edged higher to N293.7bn in FY18 (FY17: N246.7bn), resulting in a higher total debt service coverage ratio of 1.9x (FY17: 1.3x) albeit below GCR’s benchmark of 2.5x.
Although gross and net debt to income have eased to 143% and 135% in FY18, from 191% and 182% at FY16, the metrics remain elevated. Of some concern is the potential for debt to climb towards N900bn by FY19, (given the budgeted deficit of over N70bn), which would place credit protection metrics under some pressure. However, to the extent that the debt translates into more robust economic growth and substantial increase in revenue, credit metrics are expected to improve in the medium to long term.
RATING RATIONALE OF THE BONDS
Although there has not been a default on the State’s bonds on any coupon payments date, the persistent non-compliance with monthly IGR funding requirements could be reflective of potential liquidity issues. Due to the irregular IGR funding, the funds in the sinking fund account do not provide excess cash cover or a credit enhancement to the Bonds. Accordingly, GCR no longer considers that there are meaningful structural protections for bond holders. Thus, the ratings on all the bonds issued by Lagos State have been equalised with the Issuer rating.
Continued non-compliance with the terms of respective bonds and other obligations could lead to a negative rating action. GCR also considers the debt level to be high. Thus, any further increases in debt, whether due to revenue underperformance or investment activity could place pressure on the State’s ratings. Conversely, consistent growth in revenue (especially IGR), combined with effective cost management and further diversification of the State’s economic base would allow the State to fund a larger portion of its capital investments internally and thus reduce debt levels.
NATIONAL SCALE RATINGS HISTORY
+23 41 904 9462
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2018
Lagos State Government Rating Reports (2012-17)
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.
Lagos State participated in the rating process via face-to-face management meeting, 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 Lagos State.
The information received from Lagos 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 comparative numbers);
– the unaudited full year management accounts for the year ended 31 December 2018;
– the approved budget for 2018;
– the Joint Trustees reports on the existing bonds for the periods ended 31 December 2018, 28 February 2019 and April 30, 2019;
– a breakdown of facilities available and related counterparties; and
– information specific to the Lagos State was also received.
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.