Lagos, Nigeria, 04 May 2021 – GCR Ratings (“GCR”) affirms the national scale long-term Issuer rating of BBB-(NG) with a Stable Outlook and assigns a national scale short-term Issuer rating of A3(NG) to Niger State Government. Concurrently, GCR has assigned a national scale long-term Issue rating of A-(NG) to the existing Tranche 1, N9bn Fixed Rate Bond of Niger State Government, Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Niger State Government of Nigeria||Long Term Issuer||National||BBB-(NG)||Stable|
|Short Term Issuer||National||A3(NG)|
|Tranche 1 Fixed Rate Bond||Long Term Issue||National||A-(NG)||Stable|
The ratings of Niger State Government of Nigeria (“Niger”, “the State” or “Niger State”) are largely underpinned by the well-established State Government structure and ongoing funding support from the federal government of Nigeria. This counterbalances the State’s weak entity profile, low internally generated revenue (“IGR”) due to its weak infrastructure base, as well as moderately high gearing.
With a large land mass, Niger State is a major agrarian hub in Nigeria. The State also houses three major hydro-electric dams with a combined capacity of about 1,978Megawatts. Although agriculture remain the highest employer of labour in the State, the infrastructure and value chain to transform the produce to finished product remain negligible. The weak social profile is also a rating constraint as a sizable portion of the State’s population requires free service. 66.1% of the population live below the poverty line as of 2019, while 38.8% of its labour force were unemployed as at Q4 2020, trending above the national average of 40.1% and 27.2% respectively. This said, note is taken of the various catalytic project undertaken by the State to improve agricultural output and value chain, economic activities, socio economic indicators and diversify earning base to improve IGR. In addition, Niger State’s proximity to the Federal Capital Territory also contributes to the economic activities in the State.
Operating performance is moderately negative. While the IGR contribution to total recurrent income remains low, it increased at a five-year CAGR of 29% underpinned by improvement in income tax collection. However, The State has demonstrated cost rigor, with staff cost registering comfortably below 33%, creating headroom for developmental spending. GCR expects the State’s total recurring revenue to remain weak, as the setbacks occasioned by the COVID-19 pandemic continue to constrain federal transfers and economic activities. Furthermore, the State’s cost profile is likely to come under pressure upon the implementation of the new minimum wage.
Management and Governance is slightly negative, reflecting the untimely financial reporting of the state and 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 issue and a clean report has been issued in the last five year.
Niger State’s debt remains moderate, with net debt to total income trending below 50% in most years under review. However, increased utilization of debt elevated the metric to 69% at FY19. OCF coverage of gross debt has come under pressure to register at 27% in FY19 due to decline in revenue and lack of flexibility to reduce recurrent expenditure. Positively, the State reports diverse sources of fund with long term maturity tenor and concessionary interest rates, reducing refinancing risk. Thus, operating cash flow coverage of gross interest trends around the upper limit of the intermediate range of 3x-12x. However, the State remains exposed to currency risk due to the increased utilisation of foreign debt. GCR expects the debt coverage metrics to come under pressure over the rating horizon as revenue is expected to remain weak, necessitating increased borrowing over the rating horizon.
Niger state evidences a moderate liquidity profile, with uses vs. sources coverage registering at 1.0x over a 12-month period, predicated on a small operating surplus which should be sufficient to cover planned developmental spending. Cash coverage of operating expense registered at 42 days in FY19 (FY18: 84 days). However, GCR notes that Niger State has around N5bn in contractor arrears and N15bn pension, 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 government support into the ratings as the State benefits from ongoing funding support from the federal government of Nigeria through bail out funds and steady federal allocations. 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. The federal allocation is a monthly statutory transfer due to the State, payable by the federation accounts allocation committee. However, this monthly transfer is largely susceptible to the volatility at the international oil market.
Niger State raised N9bn under its Tranche 1 Fixed Rate Bond Issuance in 2011, with the proceeds utilised for financing the socio-economic projects. The bonds are fully backed by an Irrevocable Standing Payment Order issued by the Office of the Accountant General of the Federation as a first line charge upon and payable out of the statutory allocation of the State. 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 positively considered.
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 Public Sector|
|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|
|Niger State rating reports 2012-2018|
Niger State Government
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||BBB(NG)||Stable Outlook||Jun 2011|
|Short Term Issuer||Initial||National||A3(NG)||n.a.||May 2021|
|Long Term Issuer||Last||National||BBB-(NG)||Stable Outlook||Dec 2018|
|Short Term Issuer||Last||National||A3(NG)||n.a.||May 2021|
|Tranche 1 Fixed Rate Bond||Initial||National||A-(NG)||Stable Outlook||Jun 2011|
|Tranche 1 Fixed Rate Bond||Last||National||A-(NG)||Stable Outlook||Dec 2018|
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||(1.00)|
|Total Risk Score||6.00|
|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|
|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 Niger 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.
Niger 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 Niger State Government and other reliable third parties to accord the credit ratings included:
- The audited financial results for the year ended 31 December 2019.
- Four years of comparative audited numbers.
- Budget performance report (summary) as at Q4 2020.
- Approved revised budget for 2020.
- Debt facility details as of September 2020.