Lagos, Nigeria, 13 September 2021 – GCR Ratings (“GCR”) affirms the national scale long-term and short-term Issuer rating of BBB-(NG) and A3(NG) respectively accorded to Niger State Government with a Stable Outlook. Concurrently, GCR has affirmed the national scale long-term Issue rating of A-(NG) accorded to the 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, weak infrastructure base and low internally generated revenue (“IGR”), as well as moderately high gearing.
With a large land mass, Niger State is a major agrarian hub in Nigeria. However, the infrastructure and value chain to transform the produce to finished product remain negligible, which has limited employment in the sector and income levels. Consequently, 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. 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. Some economic activity is facilitated by the three major hydro-electric dams housed in the state, with a combined capacity of about 1,978 megawatts, as well as Niger State’s proximity to the Federal Capital Territory.
Operating performance is moderately negative. IGR declined by 19% Y/Y in FY20 to register at 11bn (FY19: 13.7bn) largely due to COVID19 related disruptions. Even with the decrease, IGR progressed at a CAGR of 21% in the five years to FY20. Nevertheless, dependence on federal transfers (Statutory allocations and VAT) continues, with IGR only contributing 15% of recurrent income. Recurrent expenditure increased slightly due to the implementation of the new minimum wage and COVID related expenses but was counterbalanced by the savings on overheads due to less economic activity. Although the operating surplus narrowed in FY20, increase in capital receipts (grants and loans) supported record developmental spend of N42bn (FY19: 33bn). GCR expects improved revenue performance (driven majorly by IGR and VAT) to support an operating surplus and rising development spend over the medium term.
With the adoption of accrual IPSAS, GCR has not taken a negative adjustment for Management and Governance as the current financial reporting framework has improved disclosure. In addition, GCR notes that the Auditor General of the State has not flagged any major issue and a clean report has been issued over the past five years. Nevertheless, the timeliness and accuracy of information remains a concern.
The rise in gross debt to N83bn in FY20 (FY19: 62bn) is a rating constraint. Additional borrowings used to finance infrastructural development coupled with the weak income have resulted in a meaningful deterioration in credit protection metrics, with net debt to recurrent income rising to 105% at FY20 (FY19: 69%). Similarly operating cash flow OCF to gross debt fell to 15% (FY19: 30%), while OCF coverage of interest weakened significantly to 3.6x, from 10.6x in FY19. Nevertheless, GCR expects improved revenue performance to support improvement in credit protection metrics over the rating horizon, albeit that is debt continues to increase further pressure on metrics is likely. .The high utilisation of foreign currency denominated loan is a concern as there remains downside risk to the Naira exchange rate over the short to medium term. However, these concerns are somewhat offset by the concessionary nature of the loans, low interest rate and long maturity profile. Most loans are received from the FGN and development partners, suggesting low refinancing risk.
Niger State’s liquidity position has deteriorated somewhat, with lower cash holdings of N5bn at FY20 (FY19: XX) and a decline in days cash on hand to 28 days. (FY19: 44 days). Moreover, to conserve some cash, the State has diverted some payables and unfunded pension liabilities have increased. While this has supported firmer liquidity through the COVID disruption, it does suggest liquidity pressure over medium term as the amounts need to be settled. GCR views such deferrals negatively and could reduce the liquidity assessment further if this trend continues. GCR expects uses vs sources coverage to be around 1x-1.5x over the rating horizon, predicated on moderate additional borrowing, improved operating surplus and cash holding, sufficient to cover loan servicing, repayment, and CAPEX spend.
GCR has factored government support into the ratings as the State benefits from ongoing funding support from the federal government of Nigeria through steady federal allocations, bailout, sand palliatives where necessary. 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. The bond is expected to mature by the end of September 2020.
Rating uplift is unlikely within the medium term as the economic base remain weak, and the reliance on federal transfers (Statutory Allocations and VAT) persists. However, moderation in debt and thus gearing metrics, as well as an improved liquidity position could improve the rating. Over the longer term, sustainable growth in IGR that leads to an improvement in socio economic metrics would be positively considered.
The rating may come under pressure if there is a further increase in debt without a proportionate growth in revenue that leads to a deterioration in credit protection metrics. Weaker liquidity or a perceived weaking in government support could lead to a rating downgrade.
|Primary analyst||Idris Oyekan||Analyst: Corporate Ratings|
|Lagos, Nigeria||Idris@GCRratings.com||+234 1 9049462|
|Committee chair||Eyal Shevel||Group Head of 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, February 2021|
|Niger State rating reports 2012-2020|
Niger State Government
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||BBB(NG)||Stable Outlook||Jun 2011|
|Long Term Issuer||Last||National||BBB-(NG)||Stable Outlook||May 2021|
|Short Term Issuer||Initial||National||A3(NG)||n.a.||May 2021|
|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||May 2021|
Risk Score Summary
|Rating Components and Factors||Risk scores|
|Double Country risk score||7.50|
|Sector risk adjustment||(0.75)|
|Management and governance||(0.00)|
|Leverage & capital structure||(1.50)|
|Total Risk Score||5.75|
|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.|
|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 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 2020.
- Four years of comparative audited numbers.
- Budget performance report (summary) as at Q2 2021.
- Approved budget for 2021.