Global Credit Rating (GCR) Downgrades Lagos State’s Environmental Municipality Note


Thursday, March 14, 2019  06:40 PM / News


A week after Proshare broke the story on the Lagos State Government’s (LASG’s) default on its N4.85bn, 15.75% Series 1 Tranche B Medium Term Note raised to provide financial resources for a special purpose vehicle (SPV), Municipality Waste Management Company Limited (MWMCL), one of the Credit Rating Agencies to the Note Offer has decided to downgrade the Note from its original A(NG) rating to DD(NG) 

Rating Agency ,GCR (formerly known as Duff and Phelps), today downgraded the LASG Note Issue in the light of its March 5 2019  payment default and the failure of the State Government to fund the Notes Sinking Fund Account (SFA) in line with the terms of the Notes Supplemental Information Memorandum.


Matters Arising and Likely Scenarios 

With the downgrade of the Note a number of technical issues need to be resolved: 

  • With the LASG/MWMCL Note downgrade the Note now falls below technical investment grade. This means that Institutional Investors such as Pension Funds, Fixed Interest Mutual Funds and similar collective Investment Schemes can no longer be investors in the note and would need to immediately sell their Note assets.
  • A large sell off of the LASG/MWMCL Note could mean that the Note’s price will collapse over the next few days as Institutional Investor’s statutorily dash for the door.
  • The Note’s Issuing Houses and Trustees have an obligation to advise Investors of the status of the Note and the attendant treatment of the past due payment amounts outstanding in favour of investors. For example, will investors be paid interest on the amounts expected from their investments in the Note as at March 5 2019; if so what would be the applicable interest rates? Alternatively would the interest on the sums expected as at the beginning of March 2019 be rolled into the Note Investment as part of the Offer borrowed?
  • How will the Note’s Issuer (MWMCL) handle the issue of the new rating as it will affect the LASG’s ability to raise future Notes at favourable a price?
  • Secondary market transactions on the Note should be in a state of heightened activity; this means that some High Net Worth Individuals and Institutions (HNI’s) should be able to pick up the Notes for a song and then ride out the payment delay, enabling to price-in the adjusted default risk.
  • Since fixed income securities are considered risk free because they have near zero default risks, what happens now that GCR has rated the LASG/MWMCL’s Municipality Note as DD(NG)? Obviously the Note’s price will fall in the secondary market, but does the coupon rate (which is fixed) reflect a relatively risk free security at 15.75%?


Why the Downgrade? 

GCRs downgrade according to its recent report on the Municipality Note, follows the standard official market practice that in failing to meet payments on the Municipality Note as at when they were due the Notes rating could no longer remain the same. According to the Agency the previous rating was based on a few standard procedures and documentary practices that typically support a credit risk rating of A; these include the following: 

  • LASG's EXCO resolution in connection with the Notes
  •  Service Contract executed between LASG and Visionscape
  • Programme Trust Deeds
  • The Supplementary Trust Deed
  •  Legal Opinion from the solicitors to the Trustees, which stated that all transaction documents were valid and binding
  • Programme Information memorandum
  • Supplemental information memorandum


On the Bright side? 

Based on the Agency’s engagement with the LASG (the Irrevocable Standing Payment Order (ISPO) provider), the challenge has not been with the state’s capacity to pay but with legal restrictions on the executives ability to make payments on the Note subject to approvals of the state’s House of Assembly. This complication, in the opinion of the Rating Agency, adversely impacts the ability of the government to make payments on the Note in an orderly and pre-approved manner.


Proshare Nigeria Pvt. Ltd.

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2.      SEC Issues Public Notice on Default in Repayment on Visionscape Bond

3.      Lagos State’s Green Note Default: Understanding The Issues, Implications and Lessons

4. Lagos State Government Defaults On Green Note Issue; Investors Fret Over Yields

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
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