Announcements Corporate Rating Alerts

GCR upgrades Ondo State Government of Nigeria’s National Scale Rating to BBB(NG); Outlook: Stable

Lagos, 15 January 2021 — Global Credit Ratings has upgraded the national scale long term Issuer rating of Ondo State Government of Nigeria to BBB(NG), with the Outlook accorded as Stable. Concurrently, the national scale rating accorded to its Tranche 1 N27bn Bond Issuance was also upgraded to A(NG), with the outlook accorded as stable. The ratings are valid until October 2021.

RATING RATIONALE

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

Ondo State ranks fairly among comparable peers, given its relatively strong Internally Generated Revenue (“IGR”) base and access to diverse funding sources. However, growth remains hampered by the underdeveloped infrastructures, weak agricultural value chain and low exploration of natural resources, resulting in relatively high dependence on funding support from the federal government.

The rating upgrade reflects the improved earnings reported in recent period following the implementation of various revenue collection reforms. While these initiatives are expected to continue to support sustainable earnings, the weak country risk assessment, exacerbated by the setbacks arising from the COVID-19 crisis, as well as the dwindling oil prices and its adverse impacts on federal transfers to the State, constitute downside risks.

Internally generated revenue (IGR) moderated in FY19 as earnings now reflect historical trends, as against atypical revenue generated by the office of the Accountant General in FY18. Notwithstanding this, IGR performance was above budget for FY19, driven by increased tax revenue, peaking at N30bn in FY19 (period average: N13bn), underpinned by improved revenue collection and blockage of revenue leakages. However, taxes and other IGR sources remain small reflecting the weak internal economy and constraining financial flexibility of the State.

Recurrent expenditure has been well managed, with personnel costs to total expenditure having remained below GCR’s prudential benchmark of 33%, while overhead costs have generally increased y/y in line with expansion of administrative and social functions of the State. Notwithstanding, IGR coverage of non-debt recurrent expenditure remains low reflecting the state reliance on external transfer to meet operating cost.

Operating cash flow coverage of debt has remained relatively moderate, trending below 50% over the review period due to moderated free cash flows. This is expected to narrow in FY20 and beyond on the back of expected decline in revenues, with credit protections metrics likely to deteriorate further as more debt is utilised to augment revenue shortfalls.

Gross debt spiked sharply (by N37bn) to a period high of N97bn in FY19, due to additional bond issue and doubling of foreign loans. This notwithstanding, debt to income ratio has remained at very conservative levels (of below 100%) over the review period, well below the peer average. However, while the long-term maturities and concessional terms of the debt profile is noted, GCR negatively views the increasing foreign debt component (33% at FY19) amid the volatile foreign exchange market.

Ondo State has maintained a strong cash coverage of its operating expenses over the review period, with day’s cash on hand registering 97 days in FY19 (FY15-19 Average of 145 days) higher than GCR prudential benchmark of 60-90 days. However, the substantial unfunded employees’ liabilities (salary arrears), contractors’ arrears and treasury outstanding bills (capital and recurrent) are potential sources of liquidity pressure which could give rise to significant future cash outflow.

The N27bn bond is secured by an ISPO approved by the Federal Government of Nigeria (“FGN”), covering both the interest and principal redemption. As at September 30, 2020 there was an accrual of N10.4bn in the bond sinking fund account.

A further rating upgrade is currently constrained by the challenging operating environment. Conversely, the rating may come under pressure in the event of a sustained decrease in statutory receipts and/or IGR (negatively impacting operating cash flows). Where debt levels rise further, this could also trigger a negative rating action.

NATIONAL SCALE RATINGS HISTORY

Rating Class Rating Outlook Date
Initial Rating
Issuer rating BBB(NG) Stable October 2011
N27bn Tranche 1 Fixed Rate Bond A-(NG) Stable October 2011
Last Rating
Issuer rating BBB-(NG) Stable December 2019
N27bn Tranche 1 Fixed Rate Bond A-(NG) Stable December 2019

ANALYTICAL CONTACTS

Primary Analysts

Idris Oyekan

Lagos

+23 41 904 9462-3

Idris@gcrratings.com

Committee Chairperson

Dave King

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities, updated February 2018

Glossary of Terms/Ratios (February 2018)

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