Fitch Ratings has affirmed the Nigerian State of Kaduna’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B+’ and its National Long-term rating at ‘A+(nga)’. The Outlooks are Stable.
A draft rating action commentary (RAC) was submitted by Fitch to Kaduna on 11 March 2015, in line with the scheduled calendar. As the issuer raised an appeal in relation to the draft RAC, the applicable committee review of which has now been held by Fitch, final publication of the RAC has been delayed until the above date.
In accordance with Fitch’s policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
KEY RATING DRIVERS
The rating affirmation reflects Fitch’s expectations of the state’s continued solid financial performance due to improving local taxes. The ratings also consider potential budget pressure stemming from financial debt that could grow to fund the state’s high infrastructure investment programme.
Under Fitch’s base case scenario, the operating margin will stabilise at 40% over the medium term, in line with figures at September 2014. The full implementation of more sophisticated and reliable collection systems is expected to offset a modest growth in operating expenditure, and facilitate growth in internally generated revenue (IGR). In 9M14, IGR amounted to NGN11bn, while federal subsidies (accounting for about 80% of the state’s revenues) were NGN44bn and VAT allocation NGN8bn.
Under our base case scenario, based on the assumption of the new administration’s commitment to continue with its large infrastructure investment plan, Fitch envisages total debt to rise towards NGN65bn by 2015, from NGN56bn in 2013, to fund capital spending mainly on the power, transport, water supply, education and healthcare sectors.
Annual debt service requirements of about NGN8bn/NGN10bn will continue to be covered by the current balance in the medium term by around 3x, supported by Kaduna’s robust cash position, which administration officials plan to maintain at around NGN20bn (about NGN30bn as of 9M14).
RATING SENSITIVITIES
An upgrade could materialise if the operating margin strengthens due to local taxes increasing or cost control outperforming Fitch’s expectations.
Conversely, financial debt growth leading to a debt-to- current balance consistently above Fitch’s expectations could result in a downgrade. Political unrest damaging economic prospects could also lead to a downgrade. Also, a downgrade of the sovereign would prompt a similar action on the ratings of the state, as subnationals’ ratings usually cannot be higher than their sovereign’s under Fitch criteria.
Fitch will monitor the outcome of the upcoming elections and its impact on the state’s operations.
