Lagos Issuer Rating Upgraded as State’s Leverage Metrics Improve
GCR Ratings has upgraded Lagos State Government’s national scale long-term issuer rating to AA(NG) from AA-(NG) and affirmed its national scale short-term issuer rating at A1+(NG).
Simultaneously, GCR upgraded the national scale long-term issue rating accorded to each of Lagos State Government’s programme 3 series II (tranches II & IV) bond, series III bond, series IV bond and programme 4 series I fixed rate bond, series III green bond and Series IV fixed rate bond to AA(NG) from AA-(NG).
The rating note also added that GCR upgraded the national scale long-term issue rating accorded to Lagos State Infrastructure Sukuk SPV Plc’s series II forward-ijarah sukuk to AA(NG) from AA-(NG). The outlook on the issuer and issue ratings remains stable.
The upgrade of Lagos State Government of Nigeria’s rating has been driven by sustained improvement in revenue generation, particularly tax income, which underpins robust operating performance, firmer leverage metrics, and a stronger liquidity profile, according to GCR.
The ratings are somewhat constrained by elevated exposure to foreign currency risk as well as persistent infrastructure deficits that continue to weigh on service delivery, the rating note added.
GCR acknowledged Lagos State as the economic and financial capital of Nigeria, supported by a diverse internal economic base spanning trade, services and manufacturing.
The state hosts the headquarters of most financial institutions and a vibrant capital market, which strengthens access to both domestic and foreign capital. Its extensive logistic infrastructure of seaports, airports and associated industrial corridors further reinforces its position as a strategic gateway for international trade.
The rating agency highlighted that Lagos State is the leading destination for both direct and portfolio investments in the country and contributes an estimated NGN63 trillion to Nigeria’s GDP.
Ratings analysts said, nevertheless, a substantial share of economic activity remains informal, and the unemployment rate is slightly above the national average.
While Lagos State’s infrastructure base is more developed than that of most subnational peers, it continues to face significant pressure from rapid urbanisation and population growth, with the population currently estimated at about 30 million.
Consequently, service delivery capacity is constrained. Nonetheless, the State has demonstrated strong commitment to accelerate infrastructure investments, with over NGN1.6 trillion spent on capital projects in 2025, up from NGN1.1 trillion in 2024.
“We expect this momentum to be sustained in line with its commitment to complete ongoing projects across critical sectors”, rating analysts stated.
GCR said Lagos sustainability is neutral to the rating, highlighting that the State remains exposed to environmental and climate-related risks due to its coastal location, although the impact of these risks is currently assessed as moderate.
The State currently adopts the accrual IPSAS for financial reporting, except for the full consolidation of its subsidiaries, associates, and joint venture operations. Nevertheless, an unqualified opinion has been issued for all years under review.
Lagos’s large and diverse economy continues to support strong income growth, underpinned by a wide and expanding tax base.
The state’s internally generated revenue has more than doubled over the last five years, expanding at a 35% compound average growth rate to NGN1.7 trillion in 2025 from NGN1.2 trillion in 2024.
Ratings analysts said improved oil-related receipts have also strengthened federal transfers, while the general increase in prices continues to support strong VAT collections, raising total recurrent income to NGN2.5 trillion.
Although recurrent expenditure growth outpaced revenue, largely due to a 45% rise in overhead expenses (2024: 51%), the operating surplus remains substantial. This provides ample headroom to fund higher capital projects with limited reliance on debt financing.
“We expect the State to sustain robust operating performance over the outlook period. While the proposed Harmonised Taxes and Levies Bill could eliminate certain taxes and levies, the resultant expansion of the personal income tax base should more than offset any revenue losses”.
Furthermore, growth in VAT receipts is expected to be driven by the recent changes to the sharing formula as well as sustained economic activity in the State.
Ratings analysts said they have made positive adjustments to the leverage and capital structure on the back of consistent improvement in leverage metrics, with higher earnings offsetting the slight increase in debt.
Although gross debt (including lease liabilities and guarantees) increased to NGN3.1 trillion in 2025 due to new debt of NGN583.7 billion, net debt to recurrent income moderated to 1.05x in 2025 versus 1.24x in 2024.
Furthermore, strong operating surpluses continue to underpin healthy operating cash flow, with cash flows from operations covering 44% of gross debt in 2025 from 45% in 2024.
Lagos’ net interest coverage remains flat as stronger operating cash flows mitigated higher finance charges. Nevertheless, foreign currency risk remains elevated with foreign currency denominated debt currently accounting for 61% of total debt, down from 67% in 2024; however, recent exchange rate stability moderates the exposure.
Positively, refinancing risk is mitigated by the State’s diversified funding sources and long-dated debt maturity profile, while debt sustainability is bolstered by access to concessional financing. We expect conservative use of debt financing over the outlook period.
This, combined with stronger operating performance, should support firmer leverage metrics over the rating horizon.
The state’s liquidity is assessed as moderate, supported by large cash holdings of NGN540.6 billion as of December 2025, which adequately cover scheduled debt repayments of NGN394.4 billion over the 12-month period to December 2026.
“We expect capital expenditure to remain elevated, with approximately NGN1.7 trillion projected for various infrastructure projects”, GCR said.
Analysts said the state capital spending remains flexible and contingent on sufficient operating cash flow generation and continued access to additional debt financing.
“We forecast further liquidity support from expected operating cash flow of approximately NGN1.9 trillion and new debt issuance of about NGN216 billion over the outlook period.
“Overall, we expect liquidity sources vs uses coverage of 1.2x over 12 months and 1.1x over the 24 months to 31 December 2027”.
GCR said Lagos State’s debt structure incorporates statutory debt service deductions as a first-line charge on its internally generated revenue, ensuring that debt servicing and repayment are prioritised ahead of other expenditures.
This mechanism provides additional liquidity comfort and mitigates refinancing risk, according to analysts’ rating note.
Lagos State’s existing bonds comprise programme 3 series II (tranche II and IV), series III and series IV bonds issued under the NGN500 billion bond issuance programme as well as programme 4 series I, series II (forward-ijarah sukuk), series III (green bond) and series IV bonds issued under the NGN1 trillion hybrid bond issuance programme.
The bonds and sukuk constitute direct, unconditional, unsubordinated, senior and unsecured obligations of Lagos State and rank pari-passu in all respects with all other bonds issued by State.
While the bonds and sukuk benefit from a federal irrevocable standing payment order (ISPO) against the monthly Federation Account Allocation Committee (FAAC) allocation of the State, the ISPO coverage of the debt obligation is below 1x, as the greater proportion of the loans are serviced from the State’s IGR.
The long-term rating for the Bonds and Sukuk is equivalent to Lagos State’s long-term senior unsecured rating. A change in the rating assigned to the State will directly impact the rating of the bonds and sukuk.
The stable outlook underscores the expectation that Lagos State will continue to generate robust income that will support improved capital project implementation, enhance liquidity and support further improvement in the leverage metrics, GCR said. Oil Prices Slide Below $85 as Supply Risk Eases
