Johannesburg, 20 Dec 2013 — Global Credit Ratings has today affirmed the national scale issuer rating assigned to Ondo State Government of Nigeria of BBB(NG); with the outlook accorded as Negative. Concurrently, the N27bn Fixed Rate Development Bond rating of A-(NG) has also been affirmed; with the outlook accorded as Negative. The rating(s) are valid until 11/2014.
RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Ondo State Government of Nigeria based on the following key criteria:
Ondo State Government of Nigeria (“Ondo”) is located in the South-West region of the country, with the majority of inhabitants engaged in the agro- industry. Ondo has reported steady growth in total income over the review period, rising by 16% to N44.8bn in F12. This has largely been influenced by statutory receipts, which have averaged 71% of total income. However, the State has intensified efforts to increase self-sustainability (and reduce dependence on the Federal Government) by implementing several programmes including public financial management reforms, the establishment of modernised agro-business villages across the State and many Public Private Partnerships. In this regard, Internally Generated Revenue (“IGR”) increased significantly, from N7.2bn in F11 to N12.9bn in F12. However, this was not replicated for the 10-months to October F13, as IGR registered at a low N5.7bn, demonstrating difficulties in sustaining growth.
This notwithstanding, the States key challenge has been its inability to manage expenditure, as operating costs reported a high CAGR of 21% over the review period. This resulted in 4 successive operational deficits (F09-F12), combined totaling N51.1bn. Persistent operating deficits are not considered sustainable, and significantly hamper plans to deliver on the infrastructure plans. If such deficits persist, they will likely have a negative impact on the credit rating.
In light of the deficits, debt levels have consistently risen over the review period to meet operating requirements, as well as the substantial infrastructure capex. Thus, debt rose from a low N5.5bn at FYE08 to N40.2bn at FYE12 (including the N27bn bond). Given this, the debt to income ratio registered at a high 90% at FYE12 (FYE11: 53%). However, this could rise further given the N23bn available capacity under the existing N50bn bond programme.
The N27bn Fixed Rate Bond is secured by an Irrevocable Standing Payment Order (“ISPO”) approved by the FGN, covering both the interest cost and principal redemption. As a result a two notch rating uplift is considered appropriate for the Bond Issue.
Positive rating action is unlikely in the short term due to the State’s significant reliance on federal income and its inability to adequately grow IGR to a sustainable level that adequately covers operational requirements. Over the medium term, the proven ability to extract additional income from capex could see upwards rating migration. However, further operating deficits will likely lead to a rating downgrade, particularly if the State continues to fund the deficit through debt. In this regard, were the total debt to income ratio to rise above 100% this could trigger negative rating action. Any downward revision in federally allocated funds would also be negatively considered.
NATIONAL SCALE RATINGS HISTORY | |
Initial rating (Oct/2011) | |
Long term: BBB(NG) | |
N27bn Fixed Rate Development Bond: A-(NG) | |
Outlook: Stable | |
Last rating (Apr/2013) | |
Long term: BBB(NG) | |
N27bn Fixed Rate Development Bond: A-(NG) | |
ANALYTICAL CONTACTS | |
Primary Analyst | |
Kunle Ogundijo | |
Analyst | |
+23 41 462-2545 | |
kunle@globalratings.net | |
Committee Chairperson | |
Eyal Shevel | |
Sector Head: Corporates and Public Sector | |
Johannesburg | |
+27 11 784 1771 | |
shevel@globalratings.net | |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria For Rating Public Entities
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Ondo State Government of Nigeria participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Ondo State Government of Nigeria with no contestation of the rating.
The information received from Ondo State Government of Nigeria and other reliable third parties to accord the credit rating included the 2012 audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, managment accounts for 10 months to October 2013, budgeted financial statements, a breakdown of facilities available and related counterparties, as well as all necessary bond documentation and the most recent Trustees report. In addition, information specific to the rated entity and/or industry was also received.
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.