Fitch Affirms Nigeria's Lagos State at 'BB-'; Outlook Stable

Fri Mar 21, 2014 1:03pm EDT

(The following statement was released by the rating agency) LONDON/MILAN/FRANKFURT, March 21 (Fitch) Fitch Ratings has affirmed Lagos State's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' with Stable Outlooks and its Short-term foreign IDR at 'B'. The agency has simultaneously affirmed the National Long-term rating at 'AA(nga)' with Positive Outlook as well as the Long-term ratings of 'BB-' and 'AA(nga)' of its NGN275bn MTN programme as well as its NGN57.5bn and NGN80bn bonds, maturing in 2017 and 2019 respectively. KEY RATING DRIVERS The affirmation reflects the state's weak socio-economic indicators by international standards, which could eventually put the state's social spending under pressure, notably on health and education. The ratings also reflect Fitch's expectations of the state's continuing solid operating performance and efforts towards an increasingly sophisticated and transparent administration, which is conducive to growing private sector investments. This should contribute to balancing the budget by 2015, with stable debt coverage by the current balance of around three years. Fitch expects Lagos' revenue to remain highly diversified compared with the national average, due to forecast internal generated revenues (IGR) growing above NGN400bn by 2015, or 80% of total revenue, from about NGN200bn in 2010 (70%). Under Fitch's base case scenario, Lagos' operating margin will remain around 50% in the medium term, supported by growing local taxes, and the administration's commitment to moderate cost growth. Plans to broaden the tax base while improving collection methods could boost local tax receipts to NGN330bn by 2015, up from NGN185bn in 2012. Fitch expects capital spending to remain at NGN250bn per year in 2014 and 2015 as the state continues to invest in transport, water, health, education and social protection, in line with the levels recorded in 2013 (according to the revised 2013 budget). With a policy aimed at attracting private sector investment, Fitch believes the state could continue narrowing the deficit to achieve a balanced budget in 2015, from a peak deficit of 25% of revenues in 2010. Under Fitch's base case scenario Lagos' debt will stabilise at NGN350bn by 2015, net of repayment provisions, with bonds representing about 50% of total debt, up from about 30% in 2009 and long-term debt accounting for about 75% of total debt. These figures, if materialised, will reflect improving debt management with fixed repayment schedules, longer maturities and monthly provisions into debt reserve funds. RATING SENSITIVITIES The ratings could be upgraded if improvements in the budgetary performance lead to debt stabilising below NGN0.5trn, while maintaining a high 30% component of subsidised foreign loans, lowering the debt servicing burden. Continued growth of the local economy resulting in taxes remaining around 75% of total revenues 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. Contact: Primary Analyst Sergio Ciaramella Director +39 02 879087 216 Fitch Italia S.p.A. Via Morigi, 6 - Ingresso Via Privata Maria Teresa, 8 Milan 20123 Secondary Analyst Raffaele Carnevale Senior Director +39 02 879087 203 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE. Applicable criteria, "Tax-Supported Rating Criteria," dated 14 August 2012, and "International Local and Regional Governments Rating Criteria", dated 09 April 2013, are available at Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.