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Fitch Revises Lagos' Outlook to Negative; Affirms IDRs at 'B+'

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Wednesday, February 01, 2017 9:31 AM / Fitch Ratings 

Fitch Ratings has revised Lagos State's Outlook to Negative from Stable while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B+'. The issue ratings on Lagos' senior unsecured bonds have also been affirmed at 'B+/AA+(nga)'. The National Long-Term Rating has also been affirmed 'AA+(nga)', with Stable Outlook. 

Under EU credit rating agency (CRA) regulation, the publication of local and regional government (LRG) reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations.  

Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. 

The next scheduled review date for Fitch's ratings on Lagos State was originally 24 February 2017. However, following the downgrade of Nigeria's Outlooks we have taken a similar rating action on Lagos State as the issuer is rated at the same level as the sovereign for the Long-Term Foreign and Local Currency IDRs.  

Key Rating Drivers  

The revision of the Outlook of Lagos reflects the following key rating drivers and their relative weights:  

High 

The rating action reflects the application of Fitch's 'International Local and Regional Governments Rating Criteria - Outside United States', according to which subnationals' ratings cannot usually be higher than their sovereign. Fitch projects that Lagos will report budgetary performance and debt metrics that are commensurate with its current ratings. 

The rating action on Lagos follows the same on Nigeria's Outlook on 25 January 2017 (see ' Fitch Revises Nigeria's Outlook to Negative; Affirms at 'B+' ' at www.fitchratings.com).   

Rating Sensitivities 

A downgrade of the sovereign's ratings would lead to a corresponding action on Lagos' IDRs. In the absence of a sovereign downgrade, an operating margin declining towards 30%, unfavourable changes in the national tax policy, debt rising beyond Fitch's expectations over the medium term and economic instability, even at the local level, could lead to a downgrade. 

A sovereign upgrade may be reflected in Lagos' ratings, provided that budgetary improvements reduce debt levels to 1x the budget size. Further improvement of the local economy giving additional boost to internally generated revenues would also be positive for the ratings.  

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