Lagos, 20 January 2020 — Global Credit Rating Co. Limited (“GCR”) has affirmed the long term national scale rating assigned to Lagos State Government of Nigeria (“Lagos” or “the State”) at A+(NG). The outlook was amended to Stable, from a Rating Watch previously. Concurrently, the national scale ratings accorded to the following bond Issuances were also affirmed, whilst the outlooks were amended:
• Programme 2 Series 2 N87.5bn Fixed Rate Bond – A+(NG), Stable Outlook
• Programme 3 Series 1 N47bn Fixed Rate Bond – A+(NG), Stable Outlook
• Programme 3 Series 2 Tranche I and II N85.1bn Fixed Rate Bonds – A+(NG), Stable Outlook
• Programme 3 Series 2 Tranche III and IV N12.2bn Fixed Rate Bonds – A+(NG), Stable Outlook
The long term Issuer and Bond ratings are valid until September 2020.
In May 2019, GCR placed the ratings for Lagos on Ratings Watch as the State failed to comply with the monthly funding requirements as stipulated by the respective Trust Deeds of the existing Bonds, albeit that all debt service obligations were being made timeously and no defaults were recorded. In December 2019, the State has resumed monthly funding of the Sinking Fund Accounts (“SFAs”) and has committed to ensure compliance going forward. Thus, the rating outlook was amended to ‘Stable’, although, Global Credit Rating Co. Limited (“GCR”) will assess the extent of compliance during 1H 2020 and on an ongoing basis.
Lagos maintains a systemically important position in the country and continues to pursue an aggressive industrial and socio-economic plan, with the aim of facilitating investments and economic development. This has been largely debt-funded, raising debt to excessive levels in FY18 and 9M FY19. Despite the settlement of some outstanding bonds and commercial loans, gross debt rose by N85bn to N891bn in 9M FY19, at an annualised debt to income ratio of 192%, the highest over the review period. This was primarily underpinned by a substantial rise in outstanding payments to contractors, due to cash flow constraints. The State has indicated that the arrears have reduced to N82bn in November (9M FY19: N141bn; FY18: N203bn) following further payments. GCR takes cognisance that over 87% of debt is long term, affording the State some financial flexibility.
Lagos intends to issue a fresh N100bn Bond. This, in conjunction with other planned debt could see gross debt climb above N1tr in FY19. In the absence of commensurate revenue growth as budgeted, gross gearing could register beyond 200% and place pressure on the ratings.
GCR notes the robust internal economy of the State, underpinning strong financial independence from statutory allocations. However, all income items have been somewhat constrained, with internally generated revenue (“IGR”) likely to be slightly below budget. Nevertheless, GCR expects overall income to remain fairly stable, supported by higher statutory allocations. Other key strengths include strong operating surplus, high operating margin and adequate debt service coverage metrics.
While recurrent expenditure has been well managed, the recent implementation of wage increment will likely raise staff cost above 40% of expenditure. This could adversely impact on operating surplus if planned revenue growth is not achieved.
An upgrade is dependent on a meaningful decrease in debt and improvement in credit protection metrics. Nevertheless, demonstrated progress in diversifying the State’s economy and raising IGR and overall revenue, could also lead to firmer credit protection metrics over the medium term. Conversely, a further increase in debt, without proportionate growth in revenue, could lead to negative rating action. A recurrence to non-compliance with the terms of the respective bond issuances could also trigger negative rating action.
NATIONAL SCALE RATINGS HISTORY
+23 41 904 9462-3
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2018
Lagos State Government Rating Reports (2012–2019)
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 September 2020.
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 2018 (plus four years of comparative numbers);
– the unaudited statement of financial performance for the 9month period to September 2019;
– the approved budget for 2019;
– the Joint Trustees reports on the existing bonds for the period ended 30 November 2019
– a breakdown of facilities available and related counterparties
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.