Fitch revises Lagos’ outlook to negative

Fitch Ratings has revised the outlook on Lagos state’s long-term foreign currency Issuer Default Rating (IDR) to negative from stable.

The agency has also affirmed the long-term foreign and local currency IDRs at ‘BB-‘, Short-term IDR at ‘B’ and national long-term rating at ‘AA+.

The rating action on Lagos follows the same on Nigeria’s sovereign long-term IDR’s outlook on March 30.

The rating action reflects the application of Fitch’s ‘International local and regional governments rating criteria – outside United States’, according to which sub nationals’ ratings cannot usually be higher than their sovereign.

Fitch affirms that unfavourable changes in the national tax policy, debt rising beyond Fitch’s expectations and economic instability, even at the local level, could lead to a downgrade.

Also, a downgrade of the sovereign would prompt a similar action on the ratings of the state, as sub nationals’ ratings usually cannot be higher than their sovereign under Fitch’s criteria.

Conversely, the outlook could be revised to stable if improvements in budgetary performance result in lower debt levels while maintaining a high component of subsidised foreign loans (about 30 percent at end-2013), in turn lowering the debt servicing burden, and provided that the outlook on the sovereign is also revised to stable.

Further improvement of the local economy giving additional boost to internally generated revenue would also be positive for the ratings.

The next scheduled review date for Fitch’s ratings on Lagos State was originally September 11, 2015. However, following the downgrade of Nigeria’s outlooks, a similar rating action on Lagos State was necessary as the issuer is rated at the same level as the sovereign for the long-term foreign currency.

The outlooks on the local currency and on the national Long-term rating remain Stable as it simultaneously affirmed the long-term rating of ‘BB-‘ and national long-term rating of ‘AA+ of its NGN275bn MTN programme as well as its NGN57.5bn and NGN80bn bonds, maturing in 2017 and 2019, respectively.