A likely default by Visionscape on a N27 billion bond may have left the Lagos State government on the hook since it put up a guarantee for the firm.
Hearing of the default by Lagos State on the VisionScape bond and I think this is a very good time to bring this thread up again!!
— Zeal Ak (@zeal_a) March 6, 2019
Boss it’s just our financial press acting like half baked financial literates. LASG guaranteed the bond they are not primary obligor. They come in now that the obligor has defaulted.
— Olufemi Adebayo (@blessed_04) March 6, 2019
While the reports suggest Lagos State defaulted on the bond, it merely provided a guarantee.
An issuer backed by a conditional subnational guarantee defaulting isn’t the same as the subnational itself defaulting. NB: this isn’t a defence of the underlying issue.
— Akin Oyebode (@AO1379) March 6, 2019
The chain of events
In March 2017, the state government signed a new environmental law christened the Cleaner Lagos Initiative.
Visionscape was handed residential waste disposal, a turf that was prior to this run by Private Sector Participants (PSPs).
The State Executive Council in March 2017 passed a resolution to secure the financing structure adopted by Visionscape and its partners to raise up to N50 billion in bonds for the implementation of the CLI through the issuance of an Irrevocable Standing Payment Order (ISPO) as a charge on the State Internally Generated Revenue Account/ Environmental Trust Fund.
The company thereafter raised an initial first tranche of its bond issuance, an N27 billion, 17.5% fixed rate, a five-year bond due 2022.
What may have led to the default
The company in October last year, shut down operations citing heightened political tension in the state and reported cases of attack on its employees, destruction of its operational vehicles and equipment.
John Irvine, MD of the firm in an interview held last year suggested payments where performance-based.
Now about funding, what we are doing is a performance-based contract or project. If I don’t perform I don’t get paid. For instance, if I had to collect a million tons of waste in January and I only collected 998 tons, of course, I would not get paid for that month because it is performance based.
It is unknown if the firm has received any payments since it suspended operations.
Implications of the default
Since Lagos State has guaranteed the bond, and the company has been unable to meet the required payments, the state government may have to make the required payments.
Some reports, however, suggest that the state government was yet to make payments into a sinking fund.
The wider picture
The reported default by the company, not only increases the risk premium of the state but companies that may wish to enter into similar agreements with state governments.