Fitch Ratings has affirmed the Nigerian State of Lagos’ Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘, its short-term IDR at ‘B’ and its National Long-term rating at ‘AA+(nga)’. The Outlooks are Stable.
The agency has simultaneously affirmed the Long-term rating of ‘BB-‘ and National Long-term rating of ‘AA+(nga)’ of its NGN275bn MTN programme as well as its NGN57.5bn and NGN80bn bonds, maturing in 2017 and 2019 respectively.
A draft rating action commentary (RAC) was submitted by Fitch to Lagos 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 ratings affirmation reflects Fitch’s expectations of the state’s continued solid operating performance and efforts to promote growing private sector investments, expected to contribute to balance the budget by 2015-2016, with stable debt coverage by the current balance of around three years.
Under Fitch’s base case scenario, the operating margin will stabilise at 50% over the medium term (45% in 2014, according to preliminary figures), with revenue continuing to be driven by services and tertiary sector, making Lagos’ revenue structure more diversified than the national average. After a close to 10% growth in internally generated revenues (IGRs) to NGN285bn in 2014, Fitch expects the state to continue posting solid growth, reducing its dependence on federal allocation.
Under Fitch’s base case scenario Lagos’s debt will be at NGN450bn in 2015-2016, with bonds representing about 50% of total debt (down to about 40% when net of repayment provisions made to the sinking fund), and long-term debt stabilising at about 80% of total debt. These figures, if materialised, will compress the debt-to-revenue ratio to 90% in 2016 from 120% in 2014. In Fitch’s base case, liquidity should not be a risk, averaging NGN100bn over the medium term (NGN120bn in 2014, according to Fitch’s calculations), equivalent to approximately 1x annual debt service requirements.
The ratings could be upgraded if improvements in budgetary performance result in debt levels at 1x the budget size, while maintaining a high component of subsidised foreign loans (about 30% at end-2013), in turn lowering the debt servicing burden. Further improvement of the local economy giving additional boost to IGRs would also be positive for the ratings.
Conversely, an operating margin declining towards 30%, unfavourable changes in the national tax policy, debt rising beyond Fitch’s expectations and economic instability, even at the local level, could 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 under Fitch’s criteria.
Fitch will monitor the outcome of the upcoming elections and its impact on the state’s operations