Announcements Corporate Public Sector Rating Alerts

GCR downgrades Plateau State Government’s long term Issuer rating to BB(NG) on criteria review with a Stable Outlook and assigns a short-term Issuer rating of B(NG).

Lagos, Nigeria, 29 October 2021 – GCR Ratings (“GCR”) downgrades the national scale long-term Issuer rating of Plateau State Government to BB(NG) and concurrently assigns a national scale short-term Issuer rating of B(NG), outlook Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Plateau State Government of Nigeria Long Term Issuer National BB(NG) Stable
Short Term Issuer National B(NG)

Rating Rationale

The ratings of Plateau State Government of Nigeria (“Plateau State” or “the State”) are underpinned by the well-established State Government structure and ongoing funding support from the federal government of Nigeria. However, these are counterbalanced by elevated leverage and its relatively low internal earnings due to its weak infrastructure and economic base.

As the Plateau State’s economy is largely public sector driven, its credit profile is limited by the negligible contribution of the private sector to Internally Generated Revenue (IGR). While favourable weather and fertile land is supportive of agricultural activities, it remains largely subsistence, with negligible commercial agricultural infrastructure and agro-industry up the value chain. Consequently, income level remains low with about 55% of the citizens living below the poverty line. Thus, a sizable portion of the State’s population requires free service, which consequently elevates recurrent expenditure above the average level reported by other states. GCR takes note of various catalytic projects going on in the State, but the infrastructure needed to significantly diversify the economic base remains underdeveloped. In addition, the recent insecurity rocking the State is expected to constrain investment.

IGR has progressed consistently in the last five years to register at N19bn in FY20 (FY16: N9bn), although it still contributed a meagre 26% of total recurrent income. As this necessitates high dependence on federal transfers, Plateau State remain highly expose to macro-economic shock and vagaries in the global oil market. The bloated ISPO deductions are a critical constraint, particularly given the high recurrent expenditure, translating into a narrow operating surplus over the review period. That said, high grant income was reported in FY20 majorly due to the State Fiscal Transparency, Accountability and Sustainability (SFTAS) grant, creating some surplus for CAPEX implementation. GCR expects the bloated recurrent expenses to counterbalance the expected growth in IGR and VAT income (albeit the current VAT structure is maintained) over the outlook period.

Management and Governance is a slight negative rating factor, reflecting the inconsistent timing of financial reporting and the low level of disclosure associated with the cash based financial reporting used by the State. Nevertheless, GCR notes that the Auditor General of the State has not flagged any major issues and a clean report has been issued.

Plateau state’s elevated debt profile remains the major rating constraint, with gross debt having risen from N79bn at FY16 to N117bn at FY20 due to the yearly additional debt used to finance CAPEX spend. Consequently, Net debt to recurrent income of 137% at FY20 (FY19: 143%), is one of the weakest amongst the states. Cash flow metrics remain under pressure with operating cash flow coverage of gross debt at just 5% at fY20 (fy19: 3%) and operating cash flow of interest registering at 1x (3-year average 1x). Positively, most funding is concessionary with long term maturities and favourable interest rates, provided by the FGN and international development institutions. However, forex risk on the $31m in external loan is a concern, particularly given the projected weakness in the Naira exchange rate over the rating horizon. Also, increasing utilization of commercial loan considering the shorter maturity and higher interest rate which they command raise a concern around refinancing risk. GCR expects the debt level to remain elevated in line with historical trends as additional borrowings are expected over the outlook period.

Cash holding of about N14bn (FY19:N12bn) supported solid days cash on hand of about 75 days in FY20 (FY19: 63 days). Nevertheless, GCR negatively views the accumulation of unfunded liability arising from contractors’ arrears and employees’ benefits (which registered at N32bn in FY20, from N29bn at FY19), as it’s expected to be a source of future liquidity pressure. GCR expects sources verses uses coverage to register around 1x-1.2x over the outlook period, predicated on additional borrowing, moderate cash holding against ongoing CAPEX implementation.

GCR has factored government support into the ratings as the State benefits from ongoing funding support from the federal government of Nigeria through steady federal allocations, bailout funds, and palliatives where necessary. This is because the State fulfils a critical social service, being at the forefront of improving the day-to-day quality of life for its citizens. The federal allocation is a monthly statutory transfer due to the State, payable by the federation accounts allocation committee. However, this monthly transfer is susceptible to the vagaries at the international oil market.

Outlook Statement

The Stable Outlook reflects GCR’s view that Plateau State will continue to benefit from strong funding support from the Federal Government of Nigeria.

Rating Triggers

The rating may come under pressure if 1) there is a further rise in debt profile without proportionate growth in revenue, resulting in a further deterioration in the credit protection metrics; 2) if ISPO deductions continue to increase such that the State has little headroom to meet its recurring expenditure 3) CAPEX implementation remains weak; 4) a deterioration in audit outcomes. 5) there is deterioration in liquidity position.

A rating uplift is only likely over the medium term, dependent on sustained strong growth in IGR such that internal resources are available to meet ongoing operational requirements and the significant infrastructure capex. A reduction in debt, such that the net debt to income registers sustainably below 70% and gross interest coverage improves to the 4x-5x range would also be positively viewed.

Analytical Contacts

Primary analyst Idris Oyekan Analyst: Corporate Ratings
Lagos, Nigeria Idris@GCRratings.com +234 1 9049462
Committee chair Eyal Shevel Sector Head: Corporate and Municipal Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Local and Regional Governments, June 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, February 2021
Plateau State rating reports 2019 – 2020

Ratings History

Plateau State Government

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term Issuer Initial National BB+(NG) Stable Outlook Nov 2019
Short Term Issuer Initial National B(NG) n.a. Oct 2021
Long Term Issuer Last National BB+(NG) Negative Outlook Oct 2020
Short Term Issuer Last National B(NG) n.a. Oct 2021

Risk Score Summary

Rating Components and Factors Risk scores
Operating environment 6.75
Double country risk score 7.50
Adjustments (0.75)
Business profile (2.25)
LRG profile (1.50)
Operating performance (0.50)
Management and governance (0.25)
Financial profile (2.50)
Leverage & capital structure (2.25)
Liquidity (0.25)
Comparative profile 3.00
Government support 3.00
Peer comparison 0.00
Total Risk Score 5.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Coverage The scope of the protection provided under a contract of insurance.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with because of holding the security or asset. For a company, its exposure may relate to a product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Issuer The party indebted or the person making repayments for its borrowings.
Leverage Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security, or financial instrument.

The credit ratings have been disclosed to Plateau State Government. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Plateau State Government and its financial adviser(Eczellon Capital Limited) participated in the rating process via other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Plateau State Government and other reliable third parties to accord the credit ratings included:

  • The audited financial results for the year ended 31 December 2020.
  • Auditor General reports for the year ended 31 December 2020
  • Budget Implementation report up to 30 June 2021.
  • Four years of comparative audited numbers.
  • Approved budget for 2021.
  • Debt facility details as of March 2021


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