Lagos, 24 January 2020 — 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 2020.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Ondo State Government of Nigeria based on the following key criteria:
Ondo State ranks as one of the largest in terms of agricultural production in South-West Nigeria, and is also an oil producing State. However, its ability to stimulate economic activity and sustainable income levels remains hampered by the lack of adequate social and commercial infrastructure required. As such, the State evidences flexible funding support both from the federal government and international lending organisations to finance it huge infrastructure deficit.
In FY18, the State reported an atypical year-on-year growth of 111% in total recurring income, reflected in internally generated revenue (“IGR”), due to the implementation of revenue collection reforms, significant recovery initiatives, and blockage of leakages. While this growth was driven by a number of once off factors, the State still expects IGR to remain materially higher than previous levels. Accounts for 1H FY19 indicate strong performance across most revenue lines relative to pre-FY18 performances, but they do remain below the aggressive FY19 budget.
Reflecting the expanded administrative functions of the State, non-debt recurrent expenditure also spiked, constituting around 83% of IGR. Specifically, staff costs rose by 13% as more personnel were engaged for revenue recovery initiatives, as well as in the health sector. However, at c.50% of recurrent spend, staff costs are well beyond GCR benchmark for prudential spend. Funding support to ministries, departments and agencies of the State also increased nearly three-fold on the back of improved service delivery. While the total recurrent expenditure has normalised by 1H FY19, going forward an escalation could emanate from the implementation of the national minimum wage.
The operating surplus edged to a period high of N89bn in FY18 (at a margin of 47%), and underpinned substantial debt repayments and capex spend. In particular, developmental spending increased to c.N70bn in FY18, compared to an average of N18bn between FY14 and FY17. Notwithstanding the elevated cost profile, the State reported strong cash holding sufficient to cover 116 days of operating requirement.
Following some repayments, gross debt moderated to N59.2bn in FY18, with the State registering a much lower debt to income ratio of 31% (FY17: 86%). Included in the outstanding debt is N4.2bn, relating to N27bn Tranche 1 Bond issued in February 2012 under a N50bn Debt Issuance Programme which lapsed in 2014. Notably, foreign currency exposure has been fully eliminated at 1H FY19, with the outstanding foreign loan balance having been fully redeemed. Notwithstanding this, there exists the potential for the debt level to spike again in FY20 in view of a proposed bond issuance (of up to N14.8bn), or due to excessive utilisation of loan facilities.
The N27bn bond is secured by an ISPO approved by the Federal Government of Nigeria (“FGN”), covering both the interest and principal redemption. As at September 30, 2019 there was an accrual of c.N8bn in the bond sinking fund account
Positive rating migration could emanate from sustained improvement in the macroeconomic fundamentals of Nigeria, and an improved performance relative to budget. 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
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
Ondo State Government Rating Reports (2011–19)
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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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 2020.
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 2018 (plus four years of audited financial statements);
– unaudited management accounts for the six months period to 30 June 2019
– a breakdown of debt facilities available and related counterparties;
– approved budget for 2019; and
– trustees’ reports on the bond as at September 30, 2019
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.