Fitch says Lagos’ credit rating unaffected by Visionscape’s missed payments

Fitch Ratings, a global credit rating agency, has retained Lagos State economic ratings at B+ status, saying there’s been no negative impact on the state’s credit ratings arising from the recent missed contracted service payments by Visionscape, a municipal waste management company, to its bond holders.

The agency said the state’s B+/(AA+(ngn)/ ratings remained stable and unaffected by the default of the SPV Municipality Waste Management Contractors Limited (MWMCL) led by Visionscape, in a statement seen by BusinessDay.

“Under Fitch’s criteria, Lagos’ ratings are not impacted because the defaulted debt is not Lagos’ direct debt, as well as because its multi-annual commitment towards Visionscape is unlikely to qualify as a PPP counterparty obligation. This would make the credit quality of the bond and its issuer detached from that of Lagos,” Fitch said.

The outgoing administration of Governor Akinwunmi Ambode engaged Vision Sanitation Solutions Limited to rid Nigeria’s economic capital of festering wastes and also agreed to guarantee the company’s medium-term bond programme of N50 billion.

Visionscape missed the semi-annual principal and coupon payments for about N800 million on the first tranche of N4.85 billion which it sold to high net worth individual and fell due on March 5. The default had raised concerns among the bondholders with the investing public fearing possible consequences on the state’s credit ratings of B+, AA+ (ngn)/stable). But Fitch has dismissed the fears, saying the ratings have been unaffected by the default.

The bond was issued by Visionscape to raise funds to purchase recycling trucks and equipment, linking debt service to the proceeds coming from Lagos for the implementation of the waste recycling contract.

In a statement it issued regarding the transaction, Fitch said, “Some market participants deem Visionscape’s default to imply also the default of Lagos, given the state’s Irrevocable Standing Payment Order (ISPO) whereby a stream of its own internally generated revenue was remitted to the Special Purpose Vehicle (SPV) account for debt servicing.”

According to Fitch Ratings, the ISPO, and similar arrangements in other countries, is a mechanism enhancing the predictability of payment flows from an administration, potentially enabling it to address liquidity stress by prioritising the payment of certain liabilities.

It added, however, that such a mechanism normally falls short of the senior, unconditional, and irrevocable features qualifying it as a solvency guarantee, i.e., a guarantee of timely repayment of long-term financial liabilities, such as bonds and loans, over extended periods.

“In short the ISPO is seen as a commitment to set aside resources for debt service, making it a risk-mitigating factor in case of liquidity stress by an administration rather than a credit enhancement,” it said.

Fitch outlined its view in a report published in 2013, where it stated that “ISPOs issued against states’ own revenue may not adequately protect lenders from the risks associated with a change in government priorities” and that “despite being an irrevocable commitment on behalf of lenders, courts have occasionally ordered cessation of payments backed by an ISPO”.

It noted that by Fitch’s best understanding, it was dubious that the particular commitment underlying the Visionscape bond may meet the rateability tests under its PPP counterparty obligation criteria as Lagos lacks the control of the asset: instead it is the grantee (Visionscape) that appears to have the option to put to the state the waste recycling trucks in case of contract termination, rather than the state having the control that will enable it to operate them at the end of the PPP arrangement if it so chooses.