Fitch affirms Kaduna State at ‘B+’; outlook stable  

Fitch Ratings has affirmed the Nigerian State of Kaduna’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B+’ and National Long-term rating at ‘A+(nga)’. The Outlooks are Stable.

KEY RATING DRIVERS

The affirmation reflects Fitch’s expectations that Kaduna State will continue to achieve a healthy financial performance amid mild growth in local taxes and subsidies from the federal government. The ratings also take into account the likely increase in financial debt due to the high infrastructure investment programme, which could potentially pressurise the budget, and the weak socio-economic environment.

Finance: According to Fitch’s base case scenario, Kaduna’s operating margin should stabilise at the current level of 40% over the medium term as a modest increase in operating expenditure will be offset by an increase in internal generated revenues to NGN1.5bn per month, from about NGN1bn expected in 2014. This is a result of the full implementation of new collection tool systems for recognising taxpayers and taxable income as well as land use charge and fees.

Federal subsidies, including VAT accounts for about 80% of the state’s revenues and Fitch believes these will grow towards NGN80bn by 2016, from NGN60bn in 2013.

Yearly debt service requirements of about NGN5bn will continue to be comfortably covered by the current balance in the medium term by 2x, supported by Kaduna’s robust cash position of about NGN20bn, which administration officials plan to stabilise.

Debt:

For refinancing purposes, Kaduna issued a seven-year amortising bond of NGN8.5bn to replace a five-year bullet bond of the same amount, underpinning more conscious and sophisticated debt management. Fitch envisages a total debt to rise towards NGN65bn by 2015, from NGN56bn in 2013, to partially fund the capital spending of approximately NGN35bn-NGN40bn per annum, mainly focused on power, transport, water supply, education and healthcare sectors. Nonetheless the payback ratio (total risk to the current balance), is expected to remain stable at two years in the medium term.

Economy:

Kaduna’s socio-economic profile is below the national average in terms of wealth indicators and the unemployment rate (31% in 2013 compared with 24% at national level). Unemployment increased despite continued growth in agriculture and industrial projects, including operations in the new car/Peugeot plant and the oil refinery, employing approximately one thousand workers each, according to the state’s figures.

In an effort to support and develop its agricultural sector, Kaduna’s management aims, in collaboration with the local banking system, to provide farming SMEs with NGN1bn pooled funds.