GCR Ratings has assigned a national scale long-term issue rating of AA-(NG) to Lagos State Government’s ₦230 billion Series 4 Senior Unsecured Fixed Rate Bonds, with a stable outlook.
According to rating analysts, Lagos State raised NGN230 billion in Series 4 Senior Unsecured Fixed Rate Bonds from the Nigerian capital market at 16.25%, under its NGN1 trillion debt and hybrid instrument issuance programme, registered in May 2023.
“The rating assigned to the bonds reflects the national scale long-term rating of the issuer. This is because the bonds bear the same probability of default and reflect similar recovery prospects to the Senior Unsecured creditors of the issuer in the event of a default,” GCR stated.
The bonds are direct, unconditional, unsubordinated, senior, and unsecured obligations of Lagos State and rank pari-passu with all other bonds issued under the programme.
Proceeds from the bonds are being used to fund various socio-economic infrastructure projects, with a ten-year tenor, maturing on 20 November 2035.
Coupon payments and principal repayments will be serviced through monthly transfers from the State’s Consolidated Debt Service Account (CDSA) and an Irrevocable Standing Payment Order (ISPO), approved by the Federal Ministry of Finance, into a sinking fund account managed by bond trustees. Monthly funding will begin immediately following issuance.
GCR noted that during the first 24 months, about NGN1.39 billion will be deducted from the CDSA, increasing to NGN2.64 billion for the remaining 96 months to maturity. Additionally, ₦1.8 billion will be remitted from ISPO deductions on Lagos State’s monthly federation account allocation.
“The CDSA and ISPO remittances into the Sinking Fund Account shall be utilised for servicing the bond coupon, principal repayments on a semi-annual basis, and other obligations in respect of the bonds,” GCR explained.
“Based on our analysis of the expected inflows – as reflected in the executed Series 4 pricing supplement – both inflows will only provide 1x coverage of semi-annual interest payments during the moratorium period and 1x cumulative debt service when the 24-month moratorium lapses.”
As a result, analysts stated, no additional credit enhancement is provided by the contemplated inflows. Accordingly, the long-term rating for the Series 4 Bonds is equivalent to Lagos State’s long-term senior unsecured rating. Any change in the issuer’s rating will directly impact the Series 4 Bonds.
“The stable outlook reflects our opinion that Lagos State will continue to achieve sound operating performance that supports capital project implementation and allows for debt service costs to be adequately covered,” GCR concluded.
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