Download Cross River State Government of Nigeria

Cross River State Government of Nigeria
Nigeria Local Authority Analysis
Security class
Issuer rating
Series 1: N8bn Fixed Rate Bond
Summary of bond programme:
Total programme value: N40,000,000,000
Instruments: Various – variable coupon, zero
coupon bonds.
Coupon rate: Series specific.
Maturity: Series specific.
Status of bonds: Bonds will constitute an
irrevocable obligation of the State and shall
be a first-line charge on the Statutory Account
of the State.
Security: Security for the repayment and
other obligations of the Issuer in relation to
the Bonds shall be held by the Trustees and
shall comprise the ISPO issued by the
Accountant General of the Federation as a
first line charge upon and payable out of the
statutory allocation of the State.
Key transaction counterparties:
Issuer: Cross River State Government of
Nigeria (“Cross River State” or “the State”)
Trustees: FBN Trustees Limited, STL
Trustees Limited.
Lead Issuing House/Underwriter: FBN
Capital Limited
Reporting Accountant: Akintola Williams
Deloitte.
Solicitors to the Offer: Banwo & Ighodalo,
Agabi, Shinaba, Ogon & Co.
Registrars: First Registrars & Investor
Services Ltd.
Rating methodologies/research:
Criteria for rating Public Entities, updated
February 2015
Cross River State Government rating report
2014
Market Alert 2015, GCR downgrades five
States.
Glossary of Terms/Ratios (February 2015)
Rating history:
Initial Rating: (December 2014)
Issuer Rating: BBB(NG)
N8bn Series 1 Bond: A-(NG)
Outlook: Stable
Last Rating: (May 2015)
Issuer Rating: BBB-(NG)
N8bn Tranche 1 Bond: A-(NG)
Outlook: Negative
GCR contacts:
Primary Analyst: Kunle Ogundijo
Credit Analyst
[email protected]
Committee Chairperson:
Dave King
[email protected]
Analyst Location- Lagos, Nigeria
+23 41 462-2545
Website: http://www.globalratings.net
Nigeria Local Authority Analysis | Public Rating
December 2015
Rating scale
Rating
Rating outlook
Expiry date
National
National
BBB-(NG)
A-(NG)
Negative
November 2016
Summary rating rationale
 To expand the economy and diversify revenue sources, Cross River
State has implemented a number of agro-based programmes aimed at
increasing food production, whilst also reducing unemployment. In
addition, an improved regulatory framework has been put in place to
develop the tourism potential of the State.
 With statutory receipts averaging 79% of total revenue over the last five
years, the State remains vulnerable to the vagaries of the global oil
market. Although, in F14, the decline in statutory receipts was partly
moderated by higher Internally Generated Revenue (“IGR”), the impact
of low oil prices could be more severe in F15 and beyond, and may
expose substantial funding gaps over the medium term.
 IGR growth has remained firm, almost doubling over the six year period
to a high N13.4bn in F14, evidencing the relative success of the revenue
generation policies being implemented. Nevertheless, IGR remains
below the level required to fund recurrent expenditure, with personnel
costs surpassing IGR in all the years under review.
 While cost rationalisation measures in place resulted in a 3% decline in
recurrent expenditure to a three-year low of N39.5bn, personnel costs
have remained high, consuming a higher 40% of revenue in F14. This
remains above Global Credit Rating Co. Ltd. (“GCR”) sustainable
benchmark of 35%. As such, staff numbers need to be reduced and in
the absence of such action, financial flexibility will remain constrained,
with fewer available funds for developmental purposes.
 Debt profile has remained elevated, rising by N15.1bn to a new high of
N74.5bn at FYE14. As a consequence, the gross debt to income ratio
rose further to 135% (FYE13: 106%), while net debt to income ratio
spiked to 124% at FYE14 (FYE13: 89%). Similarly, liquidity metrics
worsened as days cash on hand declined to 56 days from 85 days in F13,
following the decline in cash resources.
 As part of palliative measures to reduce the financial strain on States
following the sustained fall in oil prices, Cross River State had
commercial loans of N33.8bn converted into Federal Government of
Nigeria (“FGN”) bonds (with lower interest rate and longer tenor),
whilst also receiving (in 3Q F15) N7.9bn in soft loans from the Central
Bank of Nigeria (“CBN”) under a special intervention fund.
 The negative outlook accorded to the State specifically reflects the high
debt levels relative to IGR.
 The N8bn bond Issuance (issued in May 2015) under the first series is
secured by an Irrevocable Standing Payment Order (“ISPO”) issued by
the FGN, covering both the interest cost and principal redemption. As a
result, a three notch rating uplift is considered appropriate for the bond
Issue.
Factors that could trigger a rating action may include;
Positive change: An upgrade is unlikely in the short term. However, a
rebound in oil prices, together with sustained growth in IGR and the
demonstrated ability to expand and diversify the State’s economic base,
could result in positive ratings action over the medium-long term.
Negative change: The ratings could come under further pressure in the
event of a sustained decrease in statutory receipts and/or IGR (negatively
impacting operating cash flows). Were debt levels to rise further, this
could also lead to further deterioration in the ratings.
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Page 2
Background to Cross River State
Cross River State was created on May 27, 1967 and
forms part of the 36 States that constitute Nigeria. It is a
coastal State located in the south-south region and
covers a land area of 20,156km2. Cross River State is
bounded to the north by Benue State, to the west by
Enugu and Abia States, and to the east by the Republic
of Cameroon, with Akwa-Ibom and the Atlantic Ocean
to the south. The State has an estimated population of
over 3 million inhabitants and the capital city is located
in Calabar. The State is currently comprised of 18 Local
Government Areas that operate under 3 senatorial
districts. Major towns include, Obudu, Ogoja, Akamkpa
and Ikom.
Being largely agrarian, the Cross River State
government has implemented a number of agro-based
programmes (including the establishment of large
plantations) expected to increase food production,
whilst also reducing unemployment and facilitating
wealth creation opportunities across the State. Major
food crops include yams, cassava, rice and plantain,
while cash crops include palm produce, cocoa, rubber
and groundnuts. Some large conglomerates recently
established large plantations in parts of the State, as part
of the private sector partnership with the government.
Besides agriculture, major mineral resources in the State
include limestone, titanium and hard stone, albeit,
commercial exploration is yet to commence.
Industrial activity in the State is supported by an airport,
which is in close proximity to the seaport, and serves as
an alternative to the Lagos and Port Harcourt seaports.
Being a major tourist hub, a number of tourist sites and
cultural activities have been upgraded to global
standards, attracting thousands of visitors all through the
year. Major tourist attractions include the Tinapa resort,
which serves as a business and leisure resort, as well as
the Obudu mountain top, Ikom monoliths, Agbokim
waterfalls, Mary Slessor Tomb, Calabar Slave Park and
the famous Calabar carnival.
N40bn bond issuance programme
In 2015, Cross River State Government of Nigeria filed
an application with the Securities and Exchange
Commission (“SEC”) to issue bonds into the Nigerian
capital market, mainly to refinance existing obligations.
The debt issuance programme is expected to be
continuously available to the State up to the limit of
N40bn, and for a period of 2 years. Although, the State
had initially applied to raise N31.95bn in bonds under
series 1, It was only able to issue N8bn bonds in May
2015, given the unfavourable market condition at the
time. The bonds under the programme are expected to
be issued in registered form and in series. Each tranche
(or series) is subject to a Supplementary Shelf
Prospectus and/or Pricing Supplement prepared on
behalf of the State by duly appointed Issuing Houses.
Key features of the programme include:
 The bonds constitute direct, unconditional and
irrevocable obligations of the State, and shall rank
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paripassu with other senior unsecured obligations of
the State.
 The method of issue for each series issued under the
Programme shall be contained in the applicable
Pricing Supplement. The series 1 Issue was partly
underwritten.
 Municipal bonds are currently exempt from taxation
in Nigeria.
 A Sinking Fund shall be created for each series in
accordance with the provisions of the Enabling Law
and the Investment and Securities Act (“ISA”) 2007.
Security for the repayment and other obligations of
the Issuer in relation to the Bonds shall be held by
the Trustees and shall comprise an ISPO1 approved
by the FGN as a first line charge upon and payable
out of the statutory allocation of the State.
As the ratings accorded under the debt issuance
programme are linked to the unsecured domestic Naira
rating accorded to Cross River State, the focus of the
analysis in this report is on the operating & economic
environment in which the State functions, as well as the
financial performance and profile of the State itself.
Unique rating considerations for the N8bn series 1 fixed
rate bond are detailed in the final section of this report.
Political considerations
Political and legislative framework
Under the Nigerian federal system of government, there
are 3 tiers of government, namely the Federal, State and
Local governments. The fiscal decentralisation model in
place is aimed at empowering the lower tiers of
government. Each tier is responsible for the provision of
various government services and has the authority to
collect and retain revenues under their respective
jurisdictions.
The major areas of jurisdiction and sources of revenue
currently available to the Federal and State
Governments, as well as their respective obligations, are
reflected as follows;
Table 1: Federal and State government duties and revenue sources
Federal government
State government
Duties
Housing
Local Government creation
Currency & external affairs
Legislature
Legislature
Education
Security
Housing
Electricity supply
Water & electricity supply
Infrast. expansion & maintenance
Road construction & maintenance
Distributions to State & Local Gov.
Health
Revenue sources
Company tax
Federal account
Oil sales
Personal income tax*
VAT
VAT allocation
Mineral royalties & rents
Derivation income
Duties
Licenses and fees*
*Collected by States. Other revenues collected & held in trust by the FGN
It is noted that revenue allocations between the Federal,
State and Local Governments change from time-to-time.
In this regard, 15% of VAT is retained by the FGN,
1
An ISPO is issued by the office of the Accountant General of the Federation
(“AGF”) and represents a first line charge on federally allocated funds
Page 3
whilst State and Local Governments are apportioned the
remaining 50% and 35% respectively. In terms of
federally allocated revenues (excluding VAT), as it
currently stands: 52.68% is allocated to the Federal
Government, 26.72% to the States and 20.6% to the
Local Government Areas. A further 1% each is directed
towards the Federal Capital Territory and Ecological
Fund. In addition, mineral producing states receive a
13% derivation from the FGN.
Political factors
The FGN allocates revenue (accruing to the country)
among the various tiers of government, and (by law) all
activities that relate to commercial mining/exploration
of mineral resources fall under its purview; with
proceeds distributed per the aforementioned sharing
arrangement.
Given the low level of internally generated revenue
reported by most States (particularly the smaller States),
they generally remain heavily dependent on federal
receipts to sustain operations. This has been aggravated
by the high operating cost structures and growing debt
burdens reported by many States, further constraining
financial flexibility. Consequently, and given the
sustained slump in global oil prices that has grossly
reduced federal receipts, many States have been unable
to meet recurrent expenditure over recent months,
demonstrated by their inability to pay workers’ salaries
& pensions and other unsecured creditors.
Given the political structures in place and the fact that
the FGN has ultimate responsibility for the financial
wellbeing of the States and for service delivery to
Nigerian citizens, the FGN has developed a financial
support structure for States. To this end, a
comprehensive relief package has been implemented
that will see States benefit from a cash bailout and a
restructuring of their commercial debts. The
intervention measures include:
 USD2.1bn (N413.7bn) has been appropriated from
all of the tiers of government as a direct cash
bailout, in respect of which the States have received
their portion.
 Under a special intervention fund, CBN disbursed a
sum of N338bn to 27 States in form of soft loans at
negotiated rates, in respect of which Cross River
received N7.9bn.
 Restructuring of commercial debt obligations of
States through the Debt Management Office, by
extending the tenor of the loans and thereby
reducing their annual debt service obligations. In
this regard, Cross River had commercial loans of
N33.8bn converted into FGN bonds in 3Q F15.
Administration and corporate governance
The affairs of the State are managed by an elected
governor and an executive council, which is comprised
of appointed commissioners manning various ministries,
departments and agencies. Other arms of government
include the Legislature (i.e. the Cross River State House
of Assembly), which is responsible for passing Statespecific laws. The Judiciary serves as the third arm of
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government, interpreting and adjudicating on disputes,
and is headed by the Chief Justice. Activities of the
State are governed under the 1999 Constitution of the
Federal Republic of Nigeria.
The financial statements of Cross River State have been
prepared in accordance with the provisions of the
amended Finance (Control and Management) Act 1958
Cap 144 LFN. The Accountant-General is responsible
for the preparation and presentation of the financial
statements based on section 125(5) of the constitution.
Thereafter, it is the statutory responsibility of the
Auditor General to form an independent opinion based
on the audit of the financial statements.
Cross River State’s financial statements are in
compliance with Nigeria’s Generally Accepted
Accounting Principles and Practices, and other
government-prescribed accounting regulations and
principles. Further to this, GCR’s rating review of the
State is based on audited financials for the four years to
2013, as well as unaudited financial statements for the
year ended 2014. Regarding the four years of audited
financial statements, the Auditor General issued
unqualified opinions.
Economic context
The successful conclusion of the general elections in
April 2015 culminated in the orderly transfer of power
to a new government. Coupled with the renewed
military offensive against insurgents in the NorthEastern part of the country, this has helped to create a
more stable political environment. In contrast to this
positive development, the sustained slump in the
international price of crude oil has severely affected the
Nigerian economy. As crude oil prices have halved
since 1H 2014 to trade between USD40-USD60 per
barrel, the FGN’s oil price benchmark was reduced to
USD53 per barrel for 2015 (from an initial forecast of
USD78 for 2014), forcing the Federal Government to
revise its budgets downwards (as indicated in the
Medium Term Expenditure Framework for 2015 –
2017).
Despite the above, the non-oil sector has remained the
main driver of the economy over the last few years,
contributing in excess of 80% of GDP (on the back of
solid growth in trade, textile, telecommunication, real
estate and agriculture); albeit that such growth has
largely resulted from the multiplier effect of oil
revenues across the economy. Conversely, growth in the
oil sector (which contributes the bulk of government
revenue and exports) has slowed in 2015, with falling
prices being compounded by lower crude oil production
(mainly due to theft and pipeline vandalism). This
resulted in subdued GDP growth of 2.35% in 2Q 2015,
from 3.96% in 1Q 2015 and 5.94% in 4Q 2014, with
these values being well below the average growth of
6.23% attained in 2014.
To support macro-economic stability and halt the
decline in foreign reserves, in November 2014 CBN
devalued the mid-point of the official currency trading
band from N155/USD to N168/USD and simultaneously
Page 4
widened the band to +/-5% (from +/-3% previously).
Nevertheless, demand for US Dollars continued to exert
downward pressure on the Naira in 2015, as revenue
from crude oil exports has drastically reduced.
Accordingly, the CBN further adjusted the official
exchange rate to N196.9/USD in June 2015. Despite
these corrective actions, foreign currency reserves had
declined to USD31.9bn in July 2015, from USD34.9bn
in December 2014.
Table 2: Economic indicators
GDP (USD'bn)
GDP growth (%)
GDP per capita (USD)
Debt to GDP (%)
Oil price (USD per barrel)
Avg.inflation rate (%)
2011
411.7
7.4
2012
461.0
6.6
2013
515.0
5.4
2014
568.5
6.2
2015f
581.0
3.0
1,015.8 1,030.2 1,055.8 1,091.6 1,144.0
18.0
19.0
11.0
10.5
8.4
87.0
10.8
86.5
12.2
91.2
8.5
85.6
8.1
50.7
9.7
Avg. exchange rate (NGN/USD)
155.9
Sources: NBS, CBN and World Bank.
158.8
159.3
165.1
197.0
In further support of financial stability, the harmonised
cash reserve requirement (“CRR”) on public and private
sector deposits was (in November) further reduced to
20%, from 25% in September. In addition, CBN has cut
the prime lending rate for the first time in around six
years to 11% from a high 13%, in order to increase
lending to the real sectors of the economy, including
infrastructure, agriculture, solid minerals and power.
The relaxation of both the CRR and the interest rate is
expected to increase liquidity in the economy, which
declined as a result of reduced government spending
and the introduction of the Treasury Single Account for
all government entities; the latter having been
introduced to reduce leakages and improve
accountability.
Inflation rate eased for the first time in eleven months,
falling to 9.3% in October 2015 from 9.4% the previous
month (a two-year high), mainly due to slower increases
in foodstuff prices and other consumables. Although,
the inflation rate averaged 8.1% in 2014, it has
consistently risen in 2015, underpinned by the sustained
depreciation of the Naira and the country’s persistent
current account deficits.
Short to medium term economic prospects in Nigeria
are mixed. On the one hand, the stable political
environment and strong investor interest in the economy
are positive. However, the impact of lower oil prices is
being felt acutely in 2015 in terms of constrained
government spending and the effect of oil revenues
across the economy, with overall GDP growth expected
to fall to around 3% in 2015. This will delay efforts to
reduce the country’s infrastructure deficiencies, while
the challenges of erratic power supply and security
concerns are likely to persist (especially in parts of the
North). However, the youthful urban population, with
the increased spending capacity bodes well for future
growth, and thus, GDP growth is expected to be in line
with the 6% attained over the last decade.
Income and expenditure
A 5-year historical financial synopsis is reflected at the
end of this report and brief comment follows hereafter.
The financial statements are based on the Audited
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Financial Statement for the years 2009-2013 These
statements are prepared using the cash basis of
accounting and are divided into distinct operating and
capital income/expenditure statements. The Auditor
General of Cross River State gave an unqualified audit
opinion on the results for F13.
Total revenue peaked at a high N58.7bn in F11, since
then, total revenue has evidenced successive declines
(albeit marginal) of N55.2bn in F14 (F13: N56.2bn).
The initial growth was spurred by much higher statutory
receipts, but such receipts have declined as a result of
the State’s loss of its designation as an oil producing
State (including the 13% derivation fee receivable).
Added to this, the sustained fall in global oil prices
since 2H F14 resulted in lower statutory receipts of
N41.8bn in F14 (F13: N44.2bn). Notwithstanding the
relatively small impact of the drop in oil prices on
revenue in F14, a much greater impact is expected in
F15 and F16 as oil prices have remained fluctuated
around the USD40/barrel mark, well below the revised
FGN benchmark of USD53/barrel and the highs of over
USD100/barrel reported in early 2014. To cushion the
impact of reduced revenues on governance, the State
has put in place a number of cost rationalisation
measures. Key amongst these is a reduction in the cost
of government through strict compliance with budgeted
expenditure levels and the elimination of non-essential
expenditure such as foreign travel.
Table 3: Operating
cash flow (Nm)
Total IGR
Statutory allocation
Total recurrent inc.
Personnel costs
CRF Charges
Overhead costs
Total recurrent exp.
Operating surplus
Borrowings/others
VAT proceeds
Loan Repayment
Capital expenditure
Cash & equiv.
F13
F14
Budget
F14
%
achieved
12,002
44,246
56,248
(21,673)
(4,972)
(14,176)
(40,821)
15,427
49,503
8,025
(935)
(68,974)
3,046
13,422
41,790
55,211
(22,020)
(5,972)
(11,533)
(39,526)
15,685
26,179
8,103
(259)
(63,641)
(13,933)
27,840
50,900
78,740
(23,878)
(13,677)
(15,310)
(52,865)
25,875
87,810
7,167
(804)
(122,938)
(2,889)
48.2
82.1
70.1
92.2
43.7
75.3
74.8
60.6
29.8
113.1
32.2
51.8
n.a
IGR performance has remained strong over the review
period, posting 79% growth over the three-year period
to N12.7bn in F12. Following a slight decline in F13
(attributed to lower tax income), IGR performance
rebounded to register at a peak of N13.4bn in F14. IGR
has been underpinned by income taxes, which has
comprised over 50% of IGR in most of the years under
review. Income tax rose to N6.7bn in F14 from N5.5bn
in F13, evidencing some successes in the revenue
generation policies and stimulatory economic activities.
An analysis of tax income reveals limited concentration
risk present as the top ten contributors amounted to a
cumulative N1.7bn (13% of IGR). Further contributing
to growth, other sources of IGR (including fines and
fees, rent/rates, licenses, earnings and sales of
government property) almost doubled to N2.6bn in F15
as the State stepped up the enforcement of rules and
regulations. In contrast, non-recurring revenue from
sundry receipts and refunds amounted to a lower N4bn,
while interest and investment income remained
negligible at N116m (F13: N228m).
Page 5
As a result of cost rationalisation measures, total
recurrent expenditure declined by N1.3bn to N39.5bn in
F14. This was spurred by a 19% decrease in overhead
costs to N11.5bn, following the implementation of
stricter expenditure control policies and the reduction of
wastages in the system through the elimination of nonessential expenditure. However, in contrast to the cost
savings achieved in overheads, consolidated revenue
fund charges increased by N1bn to N6bn following
higher payments made to retired staff and political
appointees. Similarly, a small N347m increase to N22bn
was reported in personnel costs, albeit comparing
favourably to the excessive increases in previous years.
Cross Rivers attributed the stable staff costs to the
implementation of regular staff audits and a reduced
employment in non-essential positions. Nevertheless,
this translated to a higher personnel costs to expenditure
ratio of 56% (F13: 53%) owing to the overall decline in
total expenditure. Relative to income the staff
expenditure ratio edged higher to 40% in F14. The high
personnel cost ratio is of concern as it has registered
above the GCR sustainable benchmark of 35% in each
of the last six years, and at current levels indicates that
there is limited scope to cut expenditure further without
major retrenchments, which may be politically
unpopular. In the absence of such action, however,
Cross River’s financial flexibility remains constrained,
with few available funds for developmental purposes.
Notwithstanding the improved IGR, it still remains well
below what is recurred to cover personnel costs. This
has entrenched the State’s reliance on the FGN for
financial sustenance, with statutory receipts comprised
an averaged 79% over the last five years (F14: 76%).
On the back of this support, Cross River State has
consistently reported operating surpluses over the
review period. With surplus remaining flat on N15.7bn
in F14, (and much lower than the N26.3bn reported in
F11), the surplus margin rose to 28.4%, from 27.4% in
F13.
In an effort to accelerate the development of
infrastructure, the State has maintained a high level of
capex spend over the last five years. Although, capex
spend registered a lower N63.6bn in F14 from N69bn in
F13, it remained much higher than previous years. Since
expanding its capex programme in F11, the State has
expended a cumulative N238.8bn on social and
commercial infrastructure. As in previous years, a
significant N46.1bn (73% of capex) was expended in
the provision of economic infrastructure, including
transportation, agriculture and power. The remainder
was expended on social infrastructure, environment and
urban renewal and administrative services to the
citizens. The industrialisation agenda embarked upon
has been largely supported by the robust surpluses, and
significant capital receipts. Notwithstanding the
progress in attaining its long term developmental
targets, sustained funding remains crucial for further
progress.
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Funding profile
The value of Cross River’s assets declined to N11.1bn
at FYE14, from N18.9bn at FYE13. However, this did
not arise from a decrease in the real value of assets, but
rather from a change in accounting procedures, whereby
fixed assets are expensed in the year of acquisition.
Cash and equivalents registered at a lower N6.1bn at
FYE14 from N9.5bn previously, underlying the
increased utilisation of cash resources to fund capex.
Nevertheless, this represented a higher 55% of asset at
FYE14 (FYE13: 50%), based on the lower assets base.
Cash is held solely in Naira denominated current
accounts placed with commercial banks in Nigeria.
Other current assets reported a 3% growth to N5bn at
FYE14, with the bulk representing advances.
The State drew down on its entire investment portfolio
(recognised as the future generation/reserve fund)
during F14, with a negative balance reported at yearend. Assets in the portfolio mainly comprised bonds and
money market securities that are supposed to be held in
trust by independent trustees and managed by
recognised fund managers. GCR is yet to receive the
most recent copy of the fund statement from the State in
this regard.
While details of the State’s borrowings are not reported
in the financial statements, schedules provided by the
State indicate an increasingly elevated debt profile. In
this regard, debt has risen by a net N52.5bn over the
five-year review period to N74.5bn at FYE14, with the
bulk incurred to sustain the industrialisation drive and to
augment dwindling statutory receipts. Of the total debt
outstanding at FYE14, a significant N48.8bn/65% of
debt relates to internal loans, mainly comprising
commercial bank loans, with the largest loan provider
being First Bank Plc at N47.7bn/64% of debt at FYE14.
Other loans are much smaller and are provided by 3
counterparties. Cognisance is taken of the fact that the
State issued N8bn fixed rate bonds in 2Q F15, which
would further raise debt, although, this is expected to
amortise through semi-annual payments until full
redemption in 2022.
Table 4: Total debt (Nm)
Internal loans
Ecobank Plc.
First Bank Ltd.
Zenith Bank
Fidelity Bank
Enterprise Bank
Diamond Bank
Foreign loans
Total loans
FYE13
40,493
343
37,437
814
1,303
247
349
18,929
59,422
FYE14
48,783
709
47,686
356
32
25,762
74,545
Foreign loans rose by a net N6.8bn to N25.8bn at
FYE14. This was due to a mix of new loans incurred as
well as the impact on the Naira depreciation on the local
currency value of the loans. The bulk of these loans are
provided by developmental agencies (including the
International Development Association and the African
Development Bank), are all USD-denominated and
generally reflect concessionary interest rates of around
1% per annum, utilised to finance development in the
State.
Page 6
Debt and liquidity metrics
As a consequence of the rise in debt, the gross debt to
income ratio rose further to 135% at FYE14 (FYE13:
106%), while the net debt to income ratio increased to
124% (FYE13: 89%). Similarly, liquidity metrics were
also constrained as days cash on hand declined to 56
days (F13: 85 days), following the increased utilisation
of cash reserves to finance capex.
N'bn
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Debt: Income Ratio
2010
2011
2012
Gross debt
Net debt: Income (RHS)
%
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
2013
2014
Gross debt: Income (RHS)
Future prospects and forecasts
The following operating and capital budget is based on
forecasts provided by Cross River State, as approved by
the State Assembly under the 2015 Appropriation Act.
With projections christened “Budget of Transition”, it
has been prepared on the basis of a number of
assumptions, in line with FGN benchmarks. These
include an average annual crude oil production of 2.28
million barrels per day, an average oil price of USD53
per barrel, and a capex-recurrent expenditure ratio of
60%:40%, in order to quicken the pace of development
in the State.
In line with previous years, the cardinal point of the
forecasts is the continued utilisation of the Medium
Term Budgetary Framework (“MTBF”), which has
formed the basis for the compilation and
implementation of budgets. The use of the MTBF has
enabled effective policy introduction, implementation,
evaluation and monitoring of all developmental
programmes across the State. This has enabled the State
to efficiently utilise and allocate limited resources
across the various sectors, including, transportation,
health and education that have witnessed significant
improvements over the last few years.
Positively, a number of programmes in the agricultural
sector have become fully operational with direct
benefits to the indigenes in form of employment and
wealth creation opportunities, while also providing a
boost to the local economy. Specifically, the recently
established (under the FGN agricultural transformation
scheme) Growth Enhancement Scheme has provided
subsidised fertilizers and improved seedlings to farmers
to boost maize, rice and cassava production in the State.
Similarly, the agro-business and entrepreneurship centre
(Songhai Farm) in Abi local government area
commenced operations with the planting of pineapple,
pepper and several other crops. The hostel for students
was also completed, while a number of the pioneer
students (who were previously sent to train at the main
Songhai centre in Porto Novo, Benin Republic) now
fully engaged at the farm settlement. The centre has
Nigeria Local Authority Analysis | Public Rating
equipped a number of local farmers with the necessary
knowledge and skills for modern farming, while also
developing agricultural capacity within the State.
A tourism policy document and regulatory framework
for the standardisation and licensing of tourism
operators in the State has been completed and its
implementation commenced in line with global best
practices. In addition, the State has begun massive
restructuring of tourism sites to upgrade facilities and
expand the tourism value-chain.
Furthermore, under the joint funding of the State and
Bank of Industry, a significant number of small scale
enterprises enjoyed credit facilities ranging from
N0.05m
to
N0.25m,
while
CBN
Funded
Entrepreneurship Development Centre helped expand
the frontiers of a private sector-led economy, training a
number of prospective entrepreneurs and supporting
others to either start up or expand their businesses.
According to the State, the continued implementation of
these policies/programmes over the medium term would
help raise the level of the IGR collections to sustainably
cover recurrent expenditure, enabling federal receipts to
be channelled towards developmental programmes.
In view of the expected increase in economic activities,
which should boost tax income, forecasts indicate IGR
will almost double to N25bn in F15. This is premised on
the continued implementation of stricter enforcement of
rules and regulations and the restructuring of Ministries,
Departments and Agencies to function efficiently and
generate revenue for the State. In contrast, on the back
of the sustained fall in oil prices, statutory allocations
are budgeted to decline by 14% to N36bn. Nevertheless,
based on the aggressive IGR target, higher total revenue
of N61bn is expected for F15.
Table 5: Operating Budgets
(N'bn)
Actual F14
Budget F15
Total IGR
13
25
% Change
86.6
Statutory allocation
42
36
(13.7)
10.7
Total recurrent inc.
55
61
Total recurrent exp.
(40)
(55)
39.7
Operating surplus
16
6
(62.4)
Other capital receipts
34
50
45.7
0
14
n.a
(64)
(73)
14.1
(14)
(3)
n.a
Borrowings
Capital expenditure
Cash & equiv.
Recurrent expenditure is budgeted to rise to around
N55bn in F15, in line with the expected increase in
economic activities, given the implementation of the
various revenue generation programmes. A portion of
expenditure includes interest and principal repayments
on existing obligations, including the N8bn fixed rate
bond. As a consequence of the higher expenditure, a
small operating surplus of N6bn is expected in F15
(F14: N16bn). The State has budgeted to continue with
its aggressive infrastructural development programme,
and a higher capex spend of N73bn is proposed for F15
(F14: N63.6bn). This will be funded from the surplus,
borrowings of N14bn (including the N8bn bond, already
Page 7
issued in May 2015) and capital receipts (including
grants and VAT receipts) of N50bn.
As at 3Q F15, Cross River State had benefitted from the
debt restructuring programme introduced by the FGN as
part of its palliative measures to address the decline in
statutory receipts. In this regard, FGN bonds of N33.8bn
have been substituted for existing commercial
obligations (representing 82% of bank loans),
effectively extending the maturities of these debt
obligations for 15-20 years, and thereby reducing annual
debt service costs.
Following the debt restructuring exercise, gross debt
would likely remain around the N70bn mark at FYE15,
given smaller payments on the loans, with the gross debt
to income ratio estimated to remain high at around
110% at FYE15.
Table 6: Revised Amortisation schedule (Series 1: N8bn Fixed Rate
Bond)
Details of the bond
Series 1 bond
N8,000m
Interest Rate:
17% p.a. fixed
Repayment Frequency per
2 (Semi-Annually)
annum:
Original Term (months):
84
No of payments:
14
ISPO Amount per Month:
N168.9m
Amortisation schedule (Nm)
Year
Beg
Payment
Interest
Principal
End
8,000
0
8,000
1,997
1,333
665
7,335
1
7,335
1,997
1,215
782
6,553
2
6,553
1,997
1,076
921
5,632
3
5,632
1,997
913
1,084
4,548
4
4,548
1,997
721
1,276
3,271
5
3,271
1,997
495
1,503
1,769
6
1,769
1,997
229
1,769
0
7
Total
13,982
5,982
8,000
Bond rating considerations
In performing the above analysis, GCR has considered
those factors impacting the general creditworthiness of
Cross River State i.e. its Issuer credit rating. However,
structural and other enhancements have been (or are
expected to be) utilised to improve the credit risk of a
specific Issue(s) under the Bond programme. In respect
of the above, apart from the scenario of a partial or full
guarantee, GCR’s approach to such Issue ratings is to
utilise the issuer rating as a base from which credit
enhancements are then considered.
N8bn Fixed Rate Bond
The Series 1 Fixed Rate Bond (issued in May 2015)
carries a 7-year maturity (2015–2022), bearing a coupon
rate of 17%. Based on the revised amortisation
schedule, principal redemption and coupon payments
totalling about N999m will be made semi-annually
(around N2bn annually), and will be payable in arrears
up to and including the maturity date. The primary
source of repayment on interest and principal of the
bonds issued is via a Sinking Fund. The Sinking Fund is
fully backed by an ISPO, approved by the Ministry of
Finance. With regards to both interest and principal
payments, monthly deductions of N169m will be made
from the State’s share of the Statutory Allocation from
the Federation Account throughout the tenor of the
bond. This equates to ring-fenced debt servicing receipts
of over N2bn in a 12-month period. Given this, the
ISPO receipts fully cover both the interest and principal
payments of the Series 1 bond. In addition, investment
income is expected to accrue on balances in the Sinking
Fund Account through the tenor of the bond.
According to the trustees, after accounting for bank
charges, management fees and refunds to the
government, there was an accrual of N665m in the
sinking fund account as at end September, 2015.
Nigeria Local Authority Analysis | Public Rating
Page 8
Cross River State Government of Nigeria
Income Statement
(Naira in Millions except as Noted)
31 December
2010
2011
2012
2013
2014
Income tax
Other internally generated revenue
Interest and investment income
Miscellaneous revenue
4,632.4
742.8
160.5
2,150.4
5,899.5
1,261.3
177.3
1,821.5
8,589.3
1,745.5
147.0
2,252.8
5,526.4
1,476.8
228.3
4,770.6
6,693.9
2,625.2
115.9
3,986.5
Total internally generated revenue
Statutory allocation
7,686.1
27,600.5
9,159.6
49,574.6
12,734.6
45,231.9
12,002.2
44,246.2
13,421.6
41,789.6
35,286.6
(12,259.2)
(3,239.3)
(9,321.5)
58,734.2
(15,454.8)
(4,455.4)
(12,565.1)
57,966.5
(19,254.0)
(5,800.4)
(14,577.8)
56,248.4
(21,673.3)
(4,971.9)
(14,176.0)
55,211.1
(22,020.3)
(5,972.4)
(11,533.4)
10,466.6
(5,661.1)
(5,296.8)
26,259.0
(7,528.4)
(7,605.7)
18,334.3
(18,652.1)
(3,762.0)
15,427.2
(28,597.0)
(935.5)
15,685.0
(25,459.8)
(258.5)
(491.3)
11,124.9
(4,079.8)
(14,105.2)
(10,033.3)
(1,942.0)
469.2
19,102.3
5,661.1
(23,951.5)
(660.9)
7,457.8
20,318.2
7,528.4
(51,089.3)
(16,445.7)
13,382.0
21,836.0
18,652.1
(55,056.3)
(17,631.9)
26,079.7
31,448.0
28,597.0
(68,973.8)
(481.0)
0.0
34,282.1
25,459.8
(63,641.2)
(660.9)
(16,445.7)
(17,631.9)
(481.0)
(4,380.3)
Consolidated revenue fund
Capital development fund
23,433.7
(660.9)
34,558.6
(16,445.7)
30,478.8
(17,631.9)
16,373.5
(481.0)
6,340.2
(4,380.3)
Total public funds
Non-interest bearing liabilities
Total liabilities
22,772.8
3,091.4
25,864.2
18,112.9
17,156.0
35,268.9
12,846.9
10,125.8
22,972.7
15,892.5
2,970.2
18,862.7
1,960.0
9,119.6
11,079.5
Investments
Cash and cash equivalents
Other current assets
4,211.9
9,901.8
11,750.5
4,811.7
22,451.8
8,005.4
4,886.8
13,288.3
4,797.6
4,522.8
9,484.1
4,855.8
(9.2)
6,086.6
5,002.1
Total assets
25,864.2
35,268.9
22,972.7
18,862.7
11,079.5
Total loans*
Internal loans
External loans
22,059.9
5,571.3
16,488.5
30,236.4
13,439.9
16,796.5
43,262.3
25,708.1
17,554.2
59,422.1
40,493.0
18,929.1
74,544.5
48,783.0
25,761.5
Efficiency
Total revenue growth
IGR growth
Total expenditure growth (including capex)
Personnel cost growth
Capex growth
IGR : Total revenue
Non IGR : Total revenue
Personnel cost: Total expenditure
Operating surplus/(loss) : Total income
Capex : Total income
12.8
8.2
(11.0)
9.4
(17.6)
21.8
78.2
49.4
29.7
67.9
66.4
19.2
71.3
26.1
113.3
15.6
84.4
47.6
44.7
87.0
(1.3)
39.0
13.3
24.6
7.8
22.0
78.0
48.6
31.6
95.0
(3.0)
(5.8)
16.0
12.6
25.3
21.3
78.7
53.1
27.4
122.6
(1.8)
11.8
(6.0)
1.6
(7.7)
24.3
75.7
55.7
28.4
115.3
Gearing & Liquidity
Days cash on hand
Total interest bearing debt : total income
Net interest bearing debt : total income
Total interest bearing debt : total assets
Net interest bearing debt : total assets
145.6
62.5
34.5
85.3
47.0
252.3
51.5
13.3
85.7
22.1
122.4
74.6
51.7
188.3
130.5
84.8
105.6
88.8
315.0
264.7
56.2
135.0
124.0
672.8
617.9
Total income
Personnel emoluments
CRF Charges
Overhead costs
Operating surplus (deficit)
Transfer (to)/from capex and development fund
Consolidated revenue fund adjustments
Transfer to/ (from) consolidated revenue fund
Capital development fund
Opening balance
Loans/ overdraft
Vat proceeds and other
Transfer (to)/ from consolidated revenue fund
Capital expenditure
Closing balance
Balance Sheet
Key Ratios
*Total debt left off balance sheet
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Nigeria Local Authority Analysis | Public Rating
Page 11
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risks and merits of the rated entity, security or financial instrument; and d.) the ratings are valid until 11/2016.
Cross River State participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of
information received was considered adequate and has been independently verified where possible.
The information received from Cross River State and other reliable third parties to accord the credit rating included;
- the 2014 unaudited financial statements
- four years of previous audited accounts
- the approved 2015 budget,
- Breakdown of facilities available and related counterparties,
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