Lagos State Debt Spikes to N2.7 Trillion – Rating Note
Lagos state government’s gross debt increased markedly to N2.3 trillion in 2023 and further to N2.7 trillion in March 2024 from N1.4 trillion due to adverse exchange rate movement, GCR Ratings note revealed.
GCR Ratings said it has affirmed the national scale long-term and short-term issuer ratings of AA-(NG) and A1+(NG) respectively accorded to Lagos State Government.
Also, the emerging market rating firm fully owned by Moody’s Investors Services affirmed the national scale long-term issue rating of AA-(NG) accorded to Lagos State Government’s programme 3 series II (tranches II & IV), series III, series IV and programme 4 series I fixed rate bond issuances.
At the same time, GCR has affirmed the national scale long-term issue rating of AA-(NG) assigned to Lagos State Infrastructure Sukuk SPV Plc’s series II forward-ijarah sukuk.
The outlooks on the issuer and issue ratings are stable, the rating note added. GCR explained that the ratings of Lagos State Government reflect the state’s sustained strong revenue generating capacity, continuous improvement in operating performance supported by its crucial position within the Nigerian economy and well-diversified internal economy.
However, the ratings are constrained by the state’s weaker leverage metrics and capital structure due to elevated debt position and high exposure to foreign currency risk. GCR stated that Lagos State’s profile is a key rating strength underpinned by its significant contribution to the nation’s economy.
The state is the economic and commercial centre of Nigeria. Despite the state’s small geographical size, it contributed about half of the country’s gross domestic product in 2023 versus 43% in 2022.
According to the rating note, Lagos continues to attract investments locally and internationally including large public infrastructure projects aimed at boosting the economy and enhancing the business environment.
However, the infrastructure deficit remains a barrier to economic growth, particularly because the fast-growing population and increasing poverty and unemployment in some areas will continue to hinder the state’s service delivery.
Operating performance is also a positive rating factor underpinned by the state’s well-diversified internal economy.
The rating note revealed that the state’s internally generated revenue (IGR) rose by 31.6% to N790.1 billion or $1.2 billion in the financial year 2023 which ended 31 December 2023 from N600.5 billion or $1.4 billion in financial 2022 mainly driven by higher tax collections.
In addition, statutory revenues including VAT grew by 41% in 2023 versus 20% in 2022 largely driven by increased receipts from the federal government’s distribution of exchange gains arising from fuel subsidy removal.
Accordingly, total recurrent income registered above N1 trillion in line with the state’s revenue forecast, GCR Ratings said in its report.
Underpinned by higher personnel and overhead costs arising from the recent upward salary adjustment as well as additional costs incurred to improve service delivery, Lagos state’s recurrent expenditure increased by 34.0% to N547.4 billion in 2023 from N408.7 billion in 2022, a review period high.
Nevertheless, the state has demonstrated strong operating efficiency over the review period with the expenditure progression contained below the growth in total income at 18.4% and 20.0% respectively.
As a result, the state’s operating surplus (before interest and capital items) remained robust increasing by 34.7% to N572.3 billion in 2023 as against N425 billion in 2022.
“We expect this trend to be sustained over the outlook period as indicated by the state’s operating performance in the first quarter of 2024”. The leverage and capital structure assessment is ratings negative due to the sustained elevated debt levels and foreign currency risk, GCR said in its rating note.
Lagos state gross debt (including contingent liabilities) increased markedly to NGN2.3 trillion in 2023 and further to NGN2.7 trillion in March 2024 from N1.4 trillion due to adverse exchange rate movement as a high portion of the state’s debt, above 53% is foreign currency (FCY) denominated.
Although, the state also reported significant revenue growth within the same period, GCR Ratings said this was not sufficient to fully absorb the negative impact of the Naira devaluation.
GCR Ratings said consequently, leverage metrics deteriorated and net debt to total income weakened to 1.8x in 2023 from 1.6x in 2022, free cash flow (FCF) coverage of gross debt declined to a review period low of 23% in 2023 from 36% in 2022 and net interest coverage reduced to 4.8x in 2023 from 6.4x due to higher finance charge from the elevated debt.
“Looking ahead, leverage and capital structure assessment could be much weaker if debt continue to rise due to adverse foreign exchange (FX) movements”, the emerging market rating agency said.
“Although, we note the state’s ongoing plan to refinance the FCY loans with local debt, we do not expect this to materialise in the near term as it will have negative consequences on the interest cover and the debt maturity profile.
“Thus, with debt (including contingent liabilities) expected to increase, maintaining comfortable leverage metrics will be dependent on the state’s ability to materially increase revenue.
“We have factored a slight improvement in the state’s liquidity assessment underpinned by the robust cash holding of N218.1 billion in December 2023, which provides adequate coverage of the short-term debt repayments of N216.6 billion”.
GCR added that liquidity is also supported by the state’s anticipated robust operating cash flow and good unencumbered cash coverage having increased significantly to 117 days in 2023 versus 58days in 2022.
“While we anticipate capital spending to remain elevated above historical levels due to the state’s commitment towards consistent infrastructure development amid prolonged inflationary pressures, we view that this will be cautiously executed based on available funds.”
Lagos State has demonstrated good access to funding, backed by well-established relationships with leading local and international financial institutions, the rating note stated.
“We have factored into our liquidity assessment, N50 billion estimated as contingent liquidity uses in respect of the credit guarantee provided by the state should it crystalises”, GCR said.
Overall, liquidity sources versus uses coverage is estimated at 1.2x over the 12-month period to December 2024. Lagos State has provided a credit guarantee to Voda Infrastructure Management Limited, a development company appointed by the state to undertake construction of its two projects, including Massey Children Hospital and Opebi Linked Bridge.
The guarantee is a total of N79 billion term loans and bond issuance obtained by Voda for the respective projects from commercial banks and bondholders.
GCR said the payment obligations (including coupon, principal repayment and other charges) on the loans and bond issue are backed by irrevocable standing payment orders issued by the state as a first-line monthly deduction from its expenditure accounts domiciled with the banks and IGR accounts respectively.
Lagos State’s existing bonds comprises series 2 (tranches II and IV), series 3 and series 4 issued under the N500 billion bond issuance programme 3 as well as series I fixed rate bonds and series II forward-ijarah sukuk under its NGN1 trillion hybrid bond issuance programme.
The bonds and sukuk issues constitute direct, unconditional, unsubordinated, senior and unsecured obligations of the issuer/sponsor and rank pari-passu in all respects with all other bonds issued by the issuer.
The payment obligations on the bonds and sukuk are serviced through monthly transfers into the sinking fund account (SFA) from the consolidated debt service account (CDSA) and the state’s monthly federal allocations (backed by an irrevocable standing payment order (ISPO)) approved by the Federal Ministry of Finance.
“Based on our analysis, the expected inflows into the SFA, will only provide 1x coverage of semi-annual interest payments during the moratorium and 1x cumulative debt service after the moratorium.
“As such, there is no additional credit enhancement offered by the contemplated inflows and thus the long-term ratings of the bonds and sukuk are equivalent to the issuer or sponsor’s long term senior unsecured rating.
“We have reviewed the trustees report for the period ending 30 June 2024 and noted that the state has complied with the terms and conditions of the respective series trust deeds in respect of the payment obligations”, GCR said.
Outlook statement
The stable outlook reflects GCR Ratings opinion that Lagos State’s ongoing aggressive revenue drive and sustained operating efficiencies will continue to contain leverage metrics within the current levels despite the expected increase in debt. #Lagos State Debt Spikes to N2.7 Trillion – Rating Note CBN Approves Unity, Providus Bank Merger Deal
