Fitch Ratings has affirmed the Nigerian State of Rivers’ Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘ and its National Long-term rating at ‘AA-(nga)’. The Outlooks are Stable.
A draft rating action commentary (RAC) was submitted by Fitch to the State of Rivers 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 that Rivers will continue to report a solid operating margin in the medium term, mainly driven by growing non-oil revenue. This will be partially offset by decreasing transfers received in reflection of lower oil price although the budget should continue to be balanced due to flexibility in expenditure.
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According to Fitch’s base case scenario, the operating margin will stabilise at 60% over the medium term (preliminary figures show 58% in 2014). Internally generated revenue (IGR) is forecast to rose towards 30% of total revenues and exceed NGN100bn by 2016, or about NGN8.5bn per month, up from NGN84bn in 2014. Backed by 2014 preliminary figures, IGR is expected to continue rising also due to more sophisticated collection, alleviating Rivers’ dependence on oil revenue. Fitch forecasts oil revenue would represent 65%-70% of annual revenue in the medium term, compared with 75%-80% in 2011-2013.
Fitch believes that debt will continue to be deployed for funding the state’s capital investment plan for the medium term. The capital expenditure is for the construction of infrastructure and service facilities such as roads, bridges, hospitals and schools, as well as in the oil and gas industry, to sustain gas supply both for the state and Nigeria.
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The administration significantly reduced Rivers’ debt levels to NGN51bn in 2014, from NGN106bn in 2013, using the current surplus generated, asset disposal proceeds and capital transfers amounting to almost NGN60bn, while maintaining investments at NGN160bn in 2014. Nevertheless, even in a stressed scenario, debt is not expected to exceed half of the budget size, with debt service cover ratio remaining strong at below one year of the current balance, when both interest and principal repayment are considered.
An upgrade could materialise if IGR rises above Fitch’s expectations, coupled with convergence of the state’s accounting principles with international standards.
Conversely, the ratings could be downgraded if the operating margin declines below 50% amid a resurgence of restiveness in the Niger Delta region while financial debt rises beyond Fitch’s projections. Also, a downgrade of the sovereign would prompt a similar action on the ratings of the state, in accordance with Fitch “International Local and Regional Governments Rating Criteria outside United States”, according to which subnationals’ ratings usually cannot be higher than their sovereign’s.
Fitch will monitor the outcome of the upcoming elections and its impact on the state’s operations