Lagos, Nigeria, 13 September 2021 – GCR Ratings (“GCR”) has affirmed the national scale long-term Issuer rating of BBB+(NG) to Ogun State Government and assigns a national scale short-term Issuer rating of A2(NG), with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Ogun State Government||Long Term Issuer||National||BBB+(NG)||Stable|
|Short Term Issuer||National||A2(NG)|
The ratings of Ogun State Government of Nigeria (“the State” or “Ogun State”) are largely underpinned by its robust internal economy, benefitting from its proximity to Lagos. However, this is counterbalanced by high gearing and a deterioration in liquidity position.
Ogun State is one of the major economic hubs in Nigeria, with sizeable industrial and agricultural activities. The State’s strong industrial growth and relatively diversified economy is supported by its proximity to the country’s largest economy, Lagos, and favourable demographics. Accordingly, socio economic metrics are stronger than the national average. Per capital income is high, as are literacy and education levels. This has resulted in the unemployment rate trending below the national average. Nevertheless, the State still lags necessary Infrastructure to support its expanding industrial base and rapid population growth. GCR takes note of the various catalytic projects to boost the infrastructure profile of the State and the planned debt financing to drive rapid expansion over the medium to long term.
Operating performance is slightly positive, balancing the strong progression in IGR against the lack of flexibility to curtail consumptive expenditure. In this regard, while IGR has generally increase in the prior years, it declined by 39% in FY20 to register at 51bn (FY19: 81bn) chiefly due to COVID-19 related disruptions. Nevertheless, the State remains dependent on federal transfers, for about half of its recurring income. Consumptive expenditure has been relatively well managed, but personnel cost surged above 33% of total expenditure in FY20 due to the implementation of the new minimum wage and COVID-19 related incentives paid to frontliners. Accordingly, the operating surplus narrowed, resulting in a decline in developmental spend for the second consecutive year. Over the rating horizon GCR expects improved revenue performance(driven by IGR and VAT growth) to support operating surplus and CAPEX implementation.
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 issues and a clean audit report has been issued in each of the past five years. Nevertheless, the timeliness and accuracy of information remain a concern.
Ogun State’s high debt level remains a constraint to the rating. While gross debt increased slightly to N131bn at FY20 (FY19: N125bn), credit protection metrics deteriorated due to the weaker income. Thus, net debt to recurrent income registered at 120% at FY20 (FY19: 53%), whilst Operating cash flow (“OCF”) to gross debt fell to just 8% (FY19: 30%) and OCF coverage of net interest dipped to 2.1x (FY19: 2.8x). 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, evidenced by low interest rates and long maturity profile. Most loans are received from the Federal Government of Nigeria (“FGN”) and development partners, suggesting low refinancing risk. GCR expects slight improvements in gearing metrics as revenue is expected to recover from the FY20 level, while only moderate additional borrowing is expected.
Ogun State’s liquidity position has deteriorated somewhat, with lower cash holding of N9bn at FY20 (FY19: N21bn) and a resulting decline in days cash on hand to 31 days. (FY19: 63days). Moreover, to conserve cash, the State has diverted some payables majorly related to employee benefits, resulting in an increase in unfunded liabilities. While this may support liquidity management through the COVID disruption, it does suggest liquidity pressure over medium term. Over the outlook period, GCR expects uses vs sources coverage to be around 1x -1.5x predicated on improved operating surplus and strong cash holding, sufficient to cover loan servicing and repayment, and CAPEX spend.
A rating uplift is dependent on sustained strong growth in IGR such that internal resources are available to meet ongoing operational requirements and the significant infrastructure capex, with reduced reliance on the Federal Government. A reduction in debt, such that the net debt to income registers sustainably below 70% and gross interest coverage improves to the 4x-5x range would also be positively viewed.
The rating may come under pressure if 1) there is a further rise in debt profile without proportionate growth in revenue, resulting in a deterioration in the credit protection metrics; 2) a significant increase in recurrent expenses which could constrains CAPEX implementation; 3) a deterioration in audit outcomes. 4) there is deterioration in liquidity position.
|Primary analyst||Idris Oyekan||Analyst: Corporate and public Sector|
|Lagos, Nigeria||Idris@GCRratings.com||+234 1 9049462|
|Committee chair||Eyal Shevel||Head: Corporate and Public Sector|
|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|
|Ogun State rating report 2020|
Ogun State Government
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial/ last||National||BBB+(NG)||Stable Outlook||October 2020|
|Short Term Issuer||Initial/ last||National||A2(NG)||n.a.||September 2021|
Risk Score Summary
|Rating Components and Factors||Risk scores|
|Doubled country risk score||7.50|
|Sector risk adjustment||(0.75)|
|Management and governance||0.00|
|Leverage & capital structure||(1.50)|
|Total Risk Score||7.00|
|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.|
|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 Ogun 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.
Ogun State Government participated in the rating process via other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Ogun 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.