Announcements Corporate Rating Alerts

GCR downgrades Gombe State Government of Nigeria’s National Scale Rating to BB+(NG); Outlook: Stable

Lagos, 15 January 2021 — Global Credit Ratings has downgraded the long term national scale rating assigned to Gombe State Government of Nigeria to BB+(NG), with the Outlook accorded as Stable. Concurrently, the following rating action was taken:

  • The national scale rating assigned to the N20bn Programme 1 Series 1 Fixed Rate Bond was downgraded to BBB+(NG), with the Outlook accorded as Stable.
  • The national scale rating assigned to the N5bn Programme 2 Series 1 Fixed Rate Bond was downgraded to BBB+(NG), with the Outlook accorded as Stable.

The long term issuer and bond ratings are valid until October 2021.

RATING RATIONALE

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

Gombe State is predominantly agrarian (crop and livestock), with all year round crop production supported by the existence of three large dams for irrigation. Nevertheless, its ability to stimulate economic activity and sustainable income levels remains hampered by lack of adequate social and commercial infrastructure required to enhance output and quality of produce through mechanisation.

The state reported a decline of 4.6% in total recurrent income in FY19 due to reduction in federal transfer. Although, the State demonstrate strong access to external support funding which accounted for 87% of total recurrent revenue in FY19 to augment its weak internally generated revenue (of 13% of total recurrent revenue in FY19), it also exhibits significant exposure to the vagaries of the crude oil market. The State’s IGR declined slightly to register at N9.3bn in FY19 (FY18: 9.9bn) due to reduction in income tax, fines and fees. The IGR continues to underperform in line with historical trend and remain small relative to peers reflecting the weak internal economy due to slow pace of industrialisation and constrained financial flexibility of the State.

Reflecting the increase in the administrative functions, total recurrent expenditure rose slightly to register at N52bn in FY19. Although staff cost increased to N24bn in FY19, it’s below the 33% benchmark of GCR. The overhead cost of the state reduced slightly to N18.7bn in FY19 (FY18: N19.9bn), a significant decline is expected in FY20 as depicted by half year performance due to reduction in economic activities.

Gombe state boost of a myriad of funding sources with long maturity tenor and concessionary rates. Gross debt rose in FY19 following additional commercial bank loan. As such the credit protection metrics deteriorated when compared with the prior year. Although foreign loan remain moderate, the state remain exposed to the possible escalation of the outstanding balance as the Naira continues to be under persistent pressure.

The rating downgrade also reflects the deterioration in the net debt to total recurrent income metric, registering at 1.0x in FY19 (FY18: 0.95x). These metrics are expected to spike in FY20 and FY21 owing to increase borrowing and declining income as evidenced by the half year performance of the State.

The existing Bond Issues (N20bn and N5bn) are secured by an Irrevocable Standing Payment Order (ISPO) approved by the FGN, covering both the interest costs and principal redemptions. As a result, a three-notch rating uplift has been assigned to the Bond Issues relative to the Issuer rating.

A positive rating migration is unlikely in the short term given the current low revenue, underlying the State’s inability to sustainably grow IGR and diversify revenue streams. This leaves little headroom to absorb earnings shocks. In contrast, the ratings may come under further pressure in the event of a decrease in revenue, requiring additional debt to finance activities, leaving the State with higher than anticipated debt level, thus weakening both debt service and credit protection metrics.

NATIONAL SCALE RATINGS HISTORY

Rating class Date of initial rating Rating Outlook
Initial rating
Issuer July 2012 BBB(NG) Stable
N20bn Programme 1 Series 1 Fixed Rate Bond July 2012 A-(NG) Stable
N5bn Programme 2 Series 1 Fixed Rate Bond December 2014 A-(NG) Stable
Last rating
Issuer December 2019 BBB-(NG) Stable
N20bn Programme 1 Series 1 Fixed Rate Bond December 2019 A-(NG) Stable
N5bn Programme 2 Series 1 Fixed Rate Bond December 2019 A-(NG) Stable

ANALYTICAL CONTACTS

Primary Analyst

Idris Oyekan

Credit Analyst

Lagos

+23 41 904 9462

Idris@gcrratings.com

Committee Chairperson

Dave King

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Public Entities, updated February 2018

Gombe State Government Rating Reports (2012 – 2019)

Glossary of Terms/Ratios (February 2018)

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