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Fitch revises Kaduna and Lagos’s outlook to stable on Sovereign Action; Affirms at ‘B’

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El-Rufai
Governor El-Rufai

TUE, OCT 13 2020-theG&BJournal-Fitch Ratings has revised the Outlook on Kaduna State’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at ‘B’.

”The next scheduled review date for Kaduna will take place in 2021,” Fitch said.

Fitch assesses Kaduna’s risk profile at ‘Vulnerable’, which combines five factors at ‘Weaker’ (revenue robustness and adjustability, expenditure sustainability, liabilities and liquidity robustness and flexibility) and one factor at ‘Midrange’ (expenditure adjustability). The ‘Vulnerable’ risk profile reflects a very high risk of an unexpected weakening of Kaduna’s ability to cover its debt service needs over the rating horizon.

In its rating scenario of a prolonged economic downturn, Fitch expects Kaduna’s debt-to-operating balance (payback) ratio to sharply increase around 23x (2019:12x) after the full disbursement of the USD350 million loan from the World Bank. Under this scenario, Fitch expects some volatility in the payback ratios in 2020-2021 as a consequence of reduced oil-related transfers from the Federal Government of Nigeria (FGN) and increased operating spending to cope with the pandemic. -The fiscal debt burden – measured by net adjusted debt-to-operating revenue – could move above 300%, while the state will continue to have a good debt servicing coverage ratio above 1.5x.

Kaduna is classified as a type B LRG by Fitch, as it covers debt service with its operating balance. Kaduna’s fast-growing 8.2 million residents and a traditionally strong primary sector contribute to weak socio-economic standards. Dominant agricultural and service sectors drive the economy, but Kaduna’s development plan focuses on the state’s rich mineral resources by attracting foreign investors to key industrial projects.

Meanwhile, Fitch Ratings has revised the Outlook on Lagos State’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at ‘B’.

‘’Following the recent revision of the Outlook on Nigeria’s IDRs (see Fitch Revises Nigeria’s Outlook to Stable, Affirms at ‘B’ dated 30 September 2020 on www.fitchratings.com), we have taken similar rating action on Lagos as it is rated at the same level as the sovereign and its Outlooks move in tandem with those on the sovereign,’’ the rating agency said.

Fitch, in their rating case scenario noted that Lagos’s net adjusted debt would increase to above NGN1.0 trillion in the medium term, reaching NGN1.2 trillion by 2024 to cope with a demanding capex plan, and the operating balance would be around NGN250 million.

‘’Lagos is classified as a type B LRG by Fitch, as it covers debt service with its operating balance. Lagos is Nigeria’s economic powerhouse with per capita GDP above USD4.000, or double the national average, as noted by Fitch but is weak by international standards.

Fuelled by public and private investment and a population over 20 million, Lagos’s diverse economy is supportive of the wide tax base that generates internally generated revenue.’’

Summary of Financial adjustments

Adjustments to 2019 year-end data

Fitch-adjusted debt include Lagos’s bond issuances at end-2019 of NGN170 billion and loans (both foreign and domestic) of NGN615 billion. In its calculation of Lagos’s adjusted-debt figure, Fitch includes NGN6 billion financial leasing for power plants an NGN41 billion pension liability.

Net-adjusted debt corresponds to the difference between adjusted debt of NGN833 billion and funds available at year-end, considered as unrestricted for debt service by Fitch.

Fitch considers that the sinking fund held at Trustees is available for bond repayments.

Lagos’s cash at year-end is considered restricted as the working capital (accounts receivables less accounts payables) is negative.

The next scheduled review date for Lagos will take place in 2021. -Fitch

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