Announcements Corporate Public Sector Rating Alerts

GCR Places Ondo State Government’s N27bn fixed rate bonds long term Issue rating of A(NG) on Negative Outlook .

Lagos, Nigeria, 04 November 2021 – GCR Ratings (“GCR”) affirms the national scale long-term Issue rating of A(NG) accorded to the N27bn restructured Fixed Rate Bond of Ondo State Government, with the outlook revised from Stable to Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
N27bn Fixed Rate Bond Long Term Issue National A(NG) Negative

Rating Rationale

Ondo State Government of Nigeria (“Ondo State” or the State”) raised N27bn under its N50bn Fixed Rate Bond Issuance programme in 2011, with the proceeds utilised to finance socio-economic projects. The bonds are fully backed by an Irrevocable Standing Payment Order (“ISPO”) issued by the Federal Ministry of Finance as a first line charge upon and payable out of the statutory allocation of the State. Due to the financial hardship occasioned by the impact of the economic recession in FY16-17, the State obtained approval to restructure the N27bn bonds with the maturity date extended by 3-years to February 2022. This was geared towards freeing up funds to meet recurrent expenditure needs of the State. Subsequently, the State secured the approval of the Federal Ministry of Finance for the extension of the monthly ISPO deductions from the State’s statutory allocations, up to the new maturity date.

Accordingly, the monthly ISPO deductions from the State’s statutory receipts was reduced to N308m (from N726m) prior to restructuring), being the sum equal to the principal, interest, and all ancillary fees payable by the Issuer into the Sinking Fund Account. The account is held and managed by the Trustees, as set out in the Supplementary Trust Deed.

GCR has reviewed the Trustees bond performance reports in respect of the bonds and no breach has been flagged so far. GCR affirmed Ondo State Government of Nigeria’s national scale long term Issuer rating of BBB(NG) in November 2021, with the outlook changed to negative due to liquidity constraints. Consequently, a three-notch uplift has been applied to the bonds, starting from the national scale long term Issuer rating of Ondo State. Thus, a national scale long term Issue rating of A(NG) has been assigned to the bonds.

Outlook Statement

The Negative Outlook reflects GCR’s view that the weak federal transfer to Ondo State and its bloated ISPO deductions will continue to constrain operating performance.

Rating Triggers

Given that the Bonds rating is linked to Ondo State’s long-term issuer rating, any change in the rating assigned to the State will directly affect the bonds rating. Also, any perceived deterioration in the funding security offered by the ISPO could also impact the bonds rating.

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 Public Sector
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, October 2021
Ondo State rating announcement, November 2021

Ratings History

Ondo State Government

Rating class Review Rating scale Rating Outlook/Watch Date
N27bn Fixed Rate Bond Initial National A-(NG) Stable Outlook October 2011
N27bn Fixed Rate Bond Last National A(NG) Stable Outlook January 2021

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
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
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.
Market An assessment of the property value, with the value being compared to similar properties in the area.
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 Ondo 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.

Ondo State Government 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 Ondo State Government and other reliable third parties to accord the credit ratings included:

  • Account Bank Statement as at 30 September 2021
  • Joint Trustees Report as at 30 September 2021


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