Lagos, Nigeria, 30 August 2021 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term Issuer ratings of A+(NG) and A1(NG) respectively accorded to Lagos State Government, with the Outlook accorded as Positive. Concurrently, GCR has affirmed the long term Issue ratings of A+(NG) each accorded to the existing Programme 3 Series 2 (tranches II & IV) and Series 3 Senior Unsecured Bond Issuances. The Programme 3 Series 1, Series 2 (tranches 1 & III) Senior Unsecured Bond Issuances were redeemed early and the related ratings have been withdrawn.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook|
|Lagos State Government of Nigeria||Long Term Issuer||National||A+(NG)||Positive|
|Short Term Issuer||National||A1(NG)|
|Senior Unsecured P3S2 T II N38.8bn Bonds||Long Term Issue||National||A+(NG)||Positive|
|Senior Unsecured P3S2 T IV N5.3bn Bonds||Long Term Issue||National||A+(NG)||Positive|
|Senior Unsecured P3S3 N100bn Bonds||Long Term Issue||National||A+(NG)||Positive|
|Senior Unsecured P3S1 N47bn Bonds||Long Term Issue||National||WD(NG)||–|
|Senior Unsecured P3S2 T I N46.4bn Bonds||Long Term Issue||National||WD(NG)||–|
|Senior Unsecured P3S2 T III N6.9bn Bonds||Long Term Issue||National||WD(NG)||–|
Lagos State Government of Nigeria’s (“the State” or “Lagos State”) ratings reflect its robust internal economy which has translated to sustained growth in Internally Generated Revenue (“IGR”). However, this rating strength is counterbalanced by the substantial rise in debt, negatively impacting credit protection metrics.
Lagos State evidences strong business profile, underpinned by its status as Nigeria’s economic, manufacturing and commercial centre, accounting for over 25% of Nigeria’s total GDP and more than 50% of non-oil GDP. The State is also a critical commercial hub for broader West African region, which ensures that it continuously attracts a diverse range of national and international businesses, as well as a highly skilled workforce. Nevertheless, Lagos is constrained by substantial social development issues, with a large portion of its population living in or close to the poverty line and large areas of informal settlements. Moreover, while the State continues to address its infrastructural deficit, it still lags the necessary infrastructures to facilitate an efficient economic environment that can cater for its rising population and address the unemployment rate.
The State’s earnings resilience is a positive rating factor. Lagos State’ well-diversified internal economy has facilitated strong underlying growth in IGR with consistent increase reported over the review period. In FY20, the State reported a c.7% growth in IGR despite the COVID-19 disruption, supportive of its relative financial independence from statutory allocations. However, this was somewhat countered by the significant increase in expenditure on personnel costs due to Covid-19 related allowances paid to health workers as well as some other operational costs. This, combined with the low inflows from federal transfers, resulted into a lower operating surplus in FY20. Nevertheless, the total expenditure progression registers well below the growth in IGR (at a five-year CAGR of 6.4% vs 8.9% respectively). While the upward trend in expenditure is expected to remain, this will be covered by the anticipated growth in IGR and total recurrent income as evidenced by 1H FY21 results.
Constraining the ratings is the State’s high debt level. Gross debt rose to N1.08trn at 1H FY21, from N791bn at FY19, as a result of which debt service metrics have weakened significantly. Net debt to revenue ratio deteriorated to 147.4% at 1H FY21 from 124% reported at FY19. Also, cash flow coverage of net debt weakened to 28.9% (FY19: 31.8%), though operating cash flow coverage of net interest remained strong at c.7x. Lagos is in the process of raising additional fund of up to N125bn from the Nigerian capital market. The proceeds will be used to refinance some of the existing bonds and the balance to be utilised for infrastructure development. Notwithstanding the high quantum of debt, GCR positively views the capital structure comprising long-term maturities and over 50% obtained at concessional terms. Nevertheless, foreign currency exposure is significantly high with more than 50% funding facilities from external sources.
Lagos State’s liquidity assessment is considered moderate with uses versus sources around 1x over a 6-month period. This is supported by the State’s strong and stable operating cash flow, and the assumption that the bond issue will be successful, which would comfortably cover the projected capex and debt repayment. Although days cash coverage remains low, GCR expects stronger operating cash flows and better debtor collection efficiencies to underpin stronger liquidity going forward.
In line with Lagos State plan to reduce finance charges, the State conducted an early redemption of its Programme 3 Series 2 (Tranches I and III) and Series 1 bonds in February 2021 and June 2021 respectively. GCR has reviewed the trustees bond performance reports in respect of the existing bonds and did note that Lagos has yet to comply with the terms of the respective Series Trust Deeds regarding the timing of funding the Consolidated Debt Service Accounts (“CDSA”). While there has not been a default, GCR negatively views the breach and will monitor compliance going forward. Accordingly, security features are not taken into account in the rating and the Bonds bear the same probability of default as the Issuer.
The Positive Outlook reflects the continued strong growth in IGR, despite the setbacks occasioned by the COVID-19 pandemic. This supports GCR’s expectation of an improved financial profile over the outlook period if gearing does not increase further.
A rating uplift is dependent on the continued growth in IGR such that there are growing resources available to meet ongoing operational requirements and the significant capex on infrastructure that is required. A reduction in debt, such that the net debt to income falls below 100% and interest coverage improves would also be positively viewed.
The rating may come under pressure with further rise in debt profile, resulting in a further deterioration in the credit protection metrics. Political events that hamper efficient operations of the State would also be negatively viewed.
|Primary analyst||Busola Akinrolabu||Analyst: Corporate Ratings|
|Lagos, Nigeria||Busola@GCRratings.com||+234 1 9049462|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@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, July 2021|
|Lagos State Credit Rating Report, May 2021|
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||A(NG)||Stable Outlook||Sep 2011|
|Short Term Issuer||Initial||National||A1(NG)||—||March 2021|
|Senior Unsecured P3S1 N47bn Bonds||Initial||National||AA-(NG)||Stable Outlook||Feb 2017|
|Senior Unsecured P3S2 T I N46.4bn Bonds||Initial||National||AA-(NG)||Stable Outlook||Dec 2017|
|Senior Unsecured P3S2 T II N38.8bn Bonds||Initial||National||AA-(NG)||Stable Outlook||Dec 2017|
|Senior Unsecured P3S2 T III N6.9bn Bonds||Initial||National||AA-(NG)||Stable Outlook||Jan 2018|
|Senior Unsecured P3S2 T IV N5.3bn Bonds||Initial||National||AA-(NG)||Stable Outlook||Jan 2018|
|Senior Unsecured P3S3 N100bn Bonds||Initial||National||A+(NG)||Stable Outlook||Dec 2019|
|Long Term Issuer||Last||National||A+(NG)||Positive Outlook||March 2021|
|Short Term Issuer||Last||National||A1(NG)||—||March 2021|
|Senior Unsecured P3S1 N47bn Bonds||Last||National||A+(NG)||Positive Outlook||March 2021|
|Senior Unsecured P3S2 T I N46.4bn Bonds||Last||National||A+(NG)||Positive Outlook||March 2021|
|Senior Unsecured P3S2 T II N38.8bn Bonds||Last||National||A+(NG)||Positive Outlook||March 2021|
|Senior Unsecured P3S2 T III N6.9bn Bonds||Last||National||A+(NG)||Positive Outlook||March 2021|
|Senior Unsecured P3S2 T IV N5.3bn Bonds||Last||National||A+(NG)||Positive Outlook||March 2021|
|Senior Unsecured P3S3 N100bn Bonds||Last||National||A+(NG)||Positive Outlook||March 2021|
RISK SCORE SUMMARY
|Rating Components and Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.25|
|Management and governance||0.00|
|Leverage & capital structure||(2.50)|
|Total Risk Score||8.50|
|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.|
|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|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|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.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|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 Lagos 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.
Lagos 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 Lagos State Government and other reliable third parties to accord the credit ratings included:
- The audited financial results for the year ended 31 December 2020.
- Four years of comparative audited numbers.
- Budget performance report (summary) as at 30 June 2021.
- Approved budget for 2021.
- Debt facility details as of 30 June 2020.
- The Joint Trustees’ reports on the existing bonds for the period ended 31 July 2021.