Announcements Corporate Rating Alerts

GCR Assigns a First-Time National Scale Rating of BB+(NG) to Benue State; Outlook Stable

Lagos, 15 January, 2021 – Global Credit Ratings has assigned a first-time long-term national scale Issuer rating of BB+(NG) to Benue State Government of Nigeria, with the outlook accorded as Stable. The ratings are valid until October 2021.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Benue State Government’s (”Benue” or “the State”) based on the following key criteria:

Benue State is a major agriculture producing State in Nigeria, but with low industrial base and an underdeveloped agrarian value chain, and an implied low internally generated revenue profile. While infrastructural development has been constrained by weak financial resources, the State intends to accelerate economic diversification and expansion over the medium term, funded by a combination of bond issue, grant funding and concessional debt facilities from the federal government (“FGN”).

The ratings are constrained by the subdued country risk assessment, owing to Nigeria’s significant exposures to volatile oil market, exacerbated by the drawn-out impact of the COVID-19 pandemic and the steep fall in global crude oil prices, factors which continue to exert pressures on the federal fiscus. Specifically, the State manifests high vulnerabilities to oil-driven federal receipts, with 67% dependence on FGN in FY19 (peer average: 61%).

However, GCR takes cognisance of the recent improvements in internally generated revenues (“IGR”) above most peers within GCR’s rated universe, underpinned by improved collection efficiencies. While this has declined in 1H FY20, impacted by COVID-19 related restrictions, firmer IGR is anticipated in 2H FY20 given the gradual pick-up in economic activity. However, the earnings profile assessment is constrained by the persistent inability of IGR to meaningfully cover operating requirements.

After accounting for non-debt recurrent expenses, Benue has reported operating surpluses at an average of 23% since FY16, but this has witnessed two consecutive contraction to a new low of 13%, and covering interest charges by a narrow 1.6x in FY19. This has resulted in the crowding out of development capital spend, with capex implementation persistently below 20% over the review period (barely 8% in FY19), as budgeted augmentation from grants and debt facilities did not materialise.

While Benue has historically maintained a relatively conservative leverage, this has elevated sharply in recent years as the State drew down on additional debt facilities. Consequently, gross debt to recurring income ratio spiked to c.100% in FY19 (FY18: 49%) and forecast to deteriorate further to around 120% in the near term due to the planned bond issue, albeit within the level reported by peers.

GCR also views the capital structure to be supportive of financial flexibility, with debt mostly obtained on concessional terms from diverse sources (60% FGN), and are long-tenured (at weighted average maturity of 20 years). Foreign currency exposure is also moderate, with only 16% drawn from external sources, albeit with potential for escalation given the persistent depreciation of the Naira against USD.

Benue’s ratings are further constrained by a weak liquidity assessment, with cash coverage of operating expenses (“opex”) below 30 days at FY19 (well below GCR’s benchmark of 60 days) with no unutilised committed facilities, but this is somewhat counterbalanced by the State’s demonstrated ability to utilise bank overdraft facilities for short term obligations. The State also reports substantial unfunded contingent liabilities, but plans to settle these in a phased approach over the medium term.

The imminent N20bn Tranche 1 Bond will have a seven-year maturity and the proceeds will be utilised to fund the construction of economically viable projects. This notwithstanding, the State will continue to service the bond obligations via an irrevocable standing payment order on its statutory allocations throughout the bond tenor

Sustained improvement in IGR translating to higher total receipts, higher liquidity profile, and debt to recurrent revenue sustained below 100% could support an upward rating migration. Conversely, negative rating action could arise from significant reduction in total receipts and further deterioration of gearing metrics beyond GCR’s expectation.

NATIONAL SCALE RATINGS HISTORY

Rating Class Rating Outlook Date
Initial Ratings
Issuer – Long term BB+(NG) Stable December 2020

ANALYTICAL CONTACTS

Primary Analyst

Samuel Popoola

Lagos

+23 41 904 9462

samuel@gcrratings.com

Committee Chairperson

Dave King

Chairman

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for rating Public Entities, February 2018;

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: . IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: . 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 November 2021.

Benue State participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Benue State.

The information received from Benue State and other reliable third parties in according the credit rating included;

  • 2019 audited annual financial statements (plus four years of comparative numbers),
  • unaudited management accounts as at June 2020,
  • 2020 Revised Appropriation Bill,
  • industry comparative data and regulatory framework,
  • a breakdown of facilities available and related counterparties.
  • 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.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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