Lagos, 21 February 2019 — Global Credit Ratings has affirmed the long term national scale Issuer rating assigned to Ondo State Government of Nigeria (“Ondo” or “the State”) at BBB-(NG), with the outlook accorded as Stable. Concurrently, the national scale rating accorded to its Tranche 1 N27bn Bond Issuance was also affirmed at A-(NG), with the outlook accorded as Stable.
The long term Issuer and Bond ratings are valid until October 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Ondo State Government of Nigeria based on the following key criteria:
Ondo State evidences funding support both from the federal government and international lending organisations. This has facilitated the implementation of various economic stimulus initiatives over the review period. However, given the huge infrastructure deficit, revenue diversification initiatives have yielded few results, which underlies its continuous reliance on external support.
Total income edged up to a period high N89.4bn in FY17 (FY13-16 average: N62.7bn), underpinned by the stability of oil production and higher global oil price, which resulted to substantial increase in statutory allocations and other special transfers and interventions. Although, this indicates the State’s strong access to external support funding to augment its weak internal revenue generation, it exhibits significant exposure to the vagaries of the crude oil market.
Although, Ondo State’s internally generated revenue (“IGR”) declined 41% in FY17, the FY16 figure was inflated by N20bn in transfers from the State Government’s ministries, departments and agencies. Aside from that, all other IGR items were higher, reflecting the general economic recovery. On the back of continued recovery in FY18, higher income tax receipts are expected to underpin an aggressive 53% growth in the IGR.
Effective cost containment initiatives saw total recurrent expenditure nearly halve to N66.8bn in FY17 (82% budget performance). The reduction followed a decline in staff cost across the State (by preventing leakages and maintaining a bona fide personnel database). Nevertheless, at 69% of total expenditure in FY17 (FY16: 53%), well above GCR’s prudential benchmark of 35%, staff costs are a constraint to financial flexibility and long term planning. If implemented, the demand for a 67% raise in the minimum wage will further elevate costs and impact the operating surplus from FY19.
The substantial debt repayments made in FY17 fully eroded the robust operating surplus. This, combined with the State’s inability to secure expected grants and other capital receipts, resulted in very low capex spend of just N2.8bn (FY13-16 average: N23bn). However, the State has plans for an aggressive N80bn in capex in FY18, funded by a robust surplus and new debt
Gross debt rose 20% to N76.6bn in FY17 as Ondo secured additional N13.2bn through various government funding interventions. Although, the increase has triggered an elevation in gross debt to income to 86% (FY16: 74%) and net debt to income to 47% (FY16: 39%), the metrics remain modest and are in line with those of similarly rated States.
The N27bn bond is secured by an Irrevocable Standing Payment Order (“ISPO”) approved by the Federal Government of Nigeria, covering both the interest and principal redemption. As at September 30, 2018 there was an accrual of N5.5bn in the bond sinking fund account.
An upgrade is unlikely in the short term given the likelihood of elevated operating costs and limited capacity for IGR growth.
However, any material reduction in statutory receipts combined with a significant increase in recurrent expenditure and a spike in the gearing metrics may trigger a downward rating movement.
NATIONAL SCALE RATINGS HISTORY
+23 41 904 9462
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
Ondo State Government Rating Reports (2011–17)
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.
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 October 2019.
Ondo State participated in the rating process via teleconferences and other written correspondences. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Ondo State Government.
The information received from Ondo State Government of Nigeria and other reliable third parties to accord the credit rating included;
– the audited accounts for the year ended 31 December 2017 (plus four years of audited financial statements);
– a breakdown of debt facilities available and related counterparties;
– approved budget for 2018; and
– trustees’ reports on the bond as at September 30, 2018
– executed deed of amendment (trust deed)
– addendum to the pricing supplement
– approved letter of ISPO extension
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.