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Nigeria Local Authority Analysis | Public Rating

Cross River State Government of Nigeria Nigeria Local Authority Analysis December 2015

Summary rating rationale

To expand the economy and diversify revenue sources, Cross River

State has implemented a number of agro-based programmes aimed at

increasing food production, whilst also reducing unemployment. In

addition, an improved regulatory framework has been put in place to

develop the tourism potential of the State.

With statutory receipts averaging 79% of total revenue over the last five

years, the State remains vulnerable to the vagaries of the global oil

market. Although, in F14, the decline in statutory receipts was partly

moderated by higher Internally Generated Revenue (“IGR”), the impact

of low oil prices could be more severe in F15 and beyond, and may

expose substantial funding gaps over the medium term.

IGR growth has remained firm, almost doubling over the six year period

to a high N13.4bn in F14, evidencing the relative success of the revenue

generation policies being implemented. Nevertheless, IGR remains

below the level required to fund recurrent expenditure, with personnel

costs surpassing IGR in all the years under review.

While cost rationalisation measures in place resulted in a 3% decline in

recurrent expenditure to a three-year low of N39.5bn, personnel costs

have remained high, consuming a higher 40% of revenue in F14. This

remains above Global Credit Rating Co. Ltd. (“GCR”) sustainable

benchmark of 35%. As such, staff numbers need to be reduced and in

the absence of such action, financial flexibility will remain constrained,

with fewer available funds for developmental purposes.

Debt profile has remained elevated, rising by N15.1bn to a new high of

N74.5bn at FYE14. As a consequence, the gross debt to income ratio

rose further to 135% (FYE13: 106%), while net debt to income ratio

spiked to 124% at FYE14 (FYE13: 89%). Similarly, liquidity metrics

worsened as days cash on hand declined to 56 days from 85 days in F13,

following the decline in cash resources.

As part of palliative measures to reduce the financial strain on States

following the sustained fall in oil prices, Cross River State had

commercial loans of N33.8bn converted into Federal Government of

Nigeria (“FGN”) bonds (with lower interest rate and longer tenor),

whilst also receiving (in 3Q F15) N7.9bn in soft loans from the Central

Bank of Nigeria (“CBN”) under a special intervention fund.

The negative outlook accorded to the State specifically reflects the high

debt levels relative to IGR.

The N8bn bond Issuance (issued in May 2015) under the first series is

secured by an Irrevocable Standing Payment Order (“ISPO”) issued by

the FGN, covering both the interest cost and principal redemption. As a

result, a three notch rating uplift is considered appropriate for the bond

Issue.

Factors that could trigger a rating action may include;

Positive change: An upgrade is unlikely in the short term. However, a

rebound in oil prices, together with sustained growth in IGR and the

demonstrated ability to expand and diversify the State’s economic base,

could result in positive ratings action over the medium-long term.

Negative change: The ratings could come under further pressure in the

event of a sustained decrease in statutory receipts and/or IGR (negatively

impacting operating cash flows). Were debt levels to rise further, this

could also lead to further deterioration in the ratings.

Security class Rating scale Rating Rating outlook Expiry date Issuer rating National BBB-(NG)

Negative November 2016 Series 1: N8bn Fixed Rate Bond National A-(NG) Summary of bond programme:

Total programme value: N40,000,000,000

Instruments: Various – variable coupon, zero

coupon bonds.

Coupon rate: Series specific.

Maturity: Series specific.

Status of bonds: Bonds will constitute an

irrevocable obligation of the State and shall

be a first-line charge on the Statutory Account

of the State.

Security: Security for the repayment and

other obligations of the Issuer in relation to

the Bonds shall be held by the Trustees and

shall comprise the ISPO issued by the

Accountant General of the Federation as a

first line charge upon and payable out of the

statutory allocation of the State. Key transaction counterparties:

Issuer: Cross River State Government of

Nigeria (“Cross River State” or “the State”)

Trustees: FBN Trustees Limited, STL

Trustees Limited.

Lead Issuing House/Underwriter: FBN

Capital Limited

Reporting Accountant: Akintola Williams

Deloitte.

Solicitors to the Offer: Banwo & Ighodalo,

Agabi, Shinaba, Ogon & Co.

Registrars: First Registrars & Investor

Services Ltd.

Rating methodologies/research:

Criteria for rating Public Entities, updated

February 2015

Cross River State Government rating report

2014

Market Alert 2015, GCR downgrades five

States.

Glossary of Terms/Ratios (February 2015)

Rating history:

Initial Rating: (December 2014)

Issuer Rating: BBB(NG)

N8bn Series 1 Bond: A-(NG)

Outlook: Stable

Last Rating: (May 2015)

Issuer Rating: BBB-(NG)

N8bn Tranche 1 Bond: A-(NG)

Outlook: Negative

GCR contacts: Primary Analyst: Kunle Ogundijo Credit Analyst

[email protected]

Committee Chairperson:

Dave King

[email protected]

Analyst Location- Lagos, Nigeria

+23 41 462-2545

Website: http://www.globalratings.net

http://www.globalratings.net/


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Background to Cross River State

Cross River State was created on May 27, 1967 and

forms part of the 36 States that constitute Nigeria. It is a

coastal State located in the south-south region and

covers a land area of 20,156km2. Cross River State is

bounded to the north by Benue State, to the west by

Enugu and Abia States, and to the east by the Republic

of Cameroon, with Akwa-Ibom and the Atlantic Ocean

to the south. The State has an estimated population of

over 3 million inhabitants and the capital city is located

in Calabar. The State is currently comprised of 18 Local

Government Areas that operate under 3 senatorial

districts. Major towns include, Obudu, Ogoja, Akamkpa

and Ikom.

Being largely agrarian, the Cross River State

government has implemented a number of agro-based

programmes (including the establishment of large

plantations) expected to increase food production,

whilst also reducing unemployment and facilitating

wealth creation opportunities across the State. Major

food crops include yams, cassava, rice and plantain,

while cash crops include palm produce, cocoa, rubber

and groundnuts. Some large conglomerates recently

established large plantations in parts of the State, as part

of the private sector partnership with the government.

Besides agriculture, major mineral resources in the State

include limestone, titanium and hard stone, albeit,

commercial exploration is yet to commence.

Industrial activity in the State is supported by an airport,

which is in close proximity to the seaport, and serves as

an alternative to the Lagos and Port Harcourt seaports.

Being a major tourist hub, a number of tourist sites and

cultural activities have been upgraded to global

standards, attracting thousands of visitors all through the

year. Major tourist attractions include the Tinapa resort,

which serves as a business and leisure resort, as well as

the Obudu mountain top, Ikom monoliths, Agbokim

waterfalls, Mary Slessor Tomb, Calabar Slave Park and

the famous Calabar carnival.

N40bn bond issuance programme

In 2015, Cross River State Government of Nigeria filed

an application with the Securities and Exchange

Commission (“SEC”) to issue bonds into the Nigerian

capital market, mainly to refinance existing obligations.

The debt issuance programme is expected to be

continuously available to the State up to the limit of

N40bn, and for a period of 2 years. Although, the State

had initially applied to raise N31.95bn in bonds under

series 1, It was only able to issue N8bn bonds in May

2015, given the unfavourable market condition at the

time. The bonds under the programme are expected to

be issued in registered form and in series. Each tranche

(or series) is subject to a Supplementary Shelf

Prospectus and/or Pricing Supplement prepared on

behalf of the State by duly appointed Issuing Houses.

Key features of the programme include:

The bonds constitute direct, unconditional and

irrevocable obligations of the State, and shall rank

paripassu with other senior unsecured obligations of

the State.

The method of issue for each series issued under the

Programme shall be contained in the applicable

Pricing Supplement. The series 1 Issue was partly

underwritten.

Municipal bonds are currently exempt from taxation

in Nigeria.

A Sinking Fund shall be created for each series in

accordance with the provisions of the Enabling Law

and the Investment and Securities Act (“ISA”) 2007.

Security for the repayment and other obligations of

the Issuer in relation to the Bonds shall be held by

the Trustees and shall comprise an ISPO1 approved

by the FGN as a first line charge upon and payable

out of the statutory allocation of the State.

As the ratings accorded under the debt issuance

programme are linked to the unsecured domestic Naira

rating accorded to Cross River State, the focus of the

analysis in this report is on the operating & economic

environment in which the State functions, as well as the

financial performance and profile of the State itself.

Unique rating considerations for the N8bn series 1 fixed

rate bond are detailed in the final section of this report.

Political considerations

Political and legislative framework

Under the Nigerian federal system of government, there

are 3 tiers of government, namely the Federal, State and

Local governments. The fiscal decentralisation model in

place is aimed at empowering the lower tiers of

government. Each tier is responsible for the provision of

various government services and has the authority to

collect and retain revenues under their respective

jurisdictions.

The major areas of jurisdiction and sources of revenue

currently available to the Federal and State

Governments, as well as their respective obligations, are

reflected as follows;

Table 1: Federal and State government duties and revenue sources

Federal government State government

Duties

Housing Local Government creation

Currency & external affairs Legislature

Legislature Education

Security Housing

Electricity supply Water & electricity supply

Infrast. expansion & maintenance Road construction & maintenance

Distributions to State & Local Gov. Health

Revenue sources

Company tax Federal account

Oil sales Personal income tax*

VAT VAT allocation

Mineral royalties & rents Derivation income

Duties Licenses and fees*

*Collected by States. Other revenues collected & held in trust by the FGN

It is noted that revenue allocations between the Federal,

State and Local Governments change from time-to-time.

In this regard, 15% of VAT is retained by the FGN,

1An ISPO is issued by the office of the Accountant General of the Federation

(“AGF”) and represents a first line charge on federally allocated funds


whilst State and Local Governments are apportioned the

remaining 50% and 35% respectively. In terms of

federally allocated revenues (excluding VAT), as it

currently stands: 52.68% is allocated to the Federal

Government, 26.72% to the States and 20.6% to the

Local Government Areas. A further 1% each is directed

towards the Federal Capital Territory and Ecological

Fund. In addition, mineral producing states receive a

13% derivation from the FGN.

Political factors

The FGN allocates revenue (accruing to the country)

among the various tiers of government, and (by law) all

activities that relate to commercial mining/exploration

of mineral resources fall under its purview; with

proceeds distributed per the aforementioned sharing

arrangement.

Given the low level of internally generated revenue

reported by most States (particularly the smaller States),

they generally remain heavily dependent on federal

receipts to sustain operations. This has been aggravated

by the high operating cost structures and growing debt

burdens reported by many States, further constraining

financial flexibility. Consequently, and given the

sustained slump in global oil prices that has grossly

reduced federal receipts, many States have been unable

to meet recurrent expenditure over recent months,

demonstrated by their inability to pay workers’ salaries

& pensions and other unsecured creditors.

Given the political structures in place and the fact that

the FGN has ultimate responsibility for the financial

wellbeing of the States and for service delivery to

Nigerian citizens, the FGN has developed a financial

support structure for States. To this end, a

comprehensive relief package has been implemented

that will see States benefit from a cash bailout and a

restructuring of their commercial debts. The

intervention measures include:

USD2.1bn (N413.7bn) has been appropriated from

all of the tiers of government as a direct cash

bailout, in respect of which the States have received

their portion.

Under a special intervention fund, CBN disbursed a

sum of N338bn to 27 States in form of soft loans at

negotiated rates, in respect of which Cross River

received N7.9bn.

Restructuring of commercial debt obligations of

States through the Debt Management Office, by

extending the tenor of the loans and thereby

reducing their annual debt service obligations. In

this regard, Cross River had commercial loans of

N33.8bn converted into FGN bonds in 3Q F15.

Administration and corporate governance

The affairs of the State are managed by an elected

governor and an executive council, which is comprised

of appointed commissioners manning various ministries,

departments and agencies. Other arms of government

include the Legislature (i.e. the Cross River State House

of Assembly), which is responsible for passing State-

specific laws. The Judiciary serves as the third arm of

government, interpreting and adjudicating on disputes,

and is headed by the Chief Justice. Activities of the

State are governed under the 1999 Constitution of the

Federal Republic of Nigeria.

The financial statements of Cross River State have been

prepared in accordance with the provisions of the

amended Finance (Control and Management) Act 1958

Cap 144 LFN. The Accountant-General is responsible

for the preparation and presentation of the financial

statements based on section 125(5) of the constitution.

Thereafter, it is the statutory responsibility of the

Auditor General to form an independent opinion based

on the audit of the financial statements.

Cross River State’s financial statements are in

compliance with Nigeria’s Generally Accepted

Accounting Principles and Practices, and other

government-prescribed accounting regulations and

principles. Further to this, GCR’s rating review of the

State is based on audited financials for the four years to

2013, as well as unaudited financial statements for the

year ended 2014. Regarding the four years of audited

financial statements, the Auditor General issued

unqualified opinions.

Economic context

The successful conclusion of the general elections in

April 2015 culminated in the orderly transfer of power

to a new government. Coupled with the renewed

military offensive against insurgents in the North-

Eastern part of the country, this has helped to create a

more stable political environment. In contrast to this

positive development, the sustained slump in the

international price of crude oil has severely affected the

Nigerian economy. As crude oil prices have halved

since 1H 2014 to trade between USD40-USD60 per

barrel, the FGN’s oil price benchmark was reduced to

USD53 per barrel for 2015 (from an initial forecast of

USD78 for 2014), forcing the Federal Government to

revise its budgets downwards (as indicated in the

Medium Term Expenditure Framework for 2015 –

2017).

Despite the above, the non-oil sector has remained the

main driver of the economy over the last few years,

contributing in excess of 80% of GDP (on the back of

solid growth in trade, textile, telecommunication, real

estate and agriculture); albeit that such growth has

largely resulted from the multiplier effect of oil

revenues across the economy. Conversely, growth in the

oil sector (which contributes the bulk of government

revenue and exports) has slowed in 2015, with falling

prices being compounded by lower crude oil production

(mainly due to theft and pipeline vandalism). This

resulted in subdued GDP growth of 2.35% in 2Q 2015,

from 3.96% in 1Q 2015 and 5.94% in 4Q 2014, with

these values being well below the average growth of

6.23% attained in 2014.

To support macro-economic stability and halt the

decline in foreign reserves, in November 2014 CBN

devalued the mid-point of the official currency trading

band from N155/USD to N168/USD and simultaneously


widened the band to +/-5% (from +/-3% previously).

Nevertheless, demand for US Dollars continued to exert

downward pressure on the Naira in 2015, as revenue

from crude oil exports has drastically reduced.

Accordingly, the CBN further adjusted the official

exchange rate to N196.9/USD in June 2015. Despite

these corrective actions, foreign currency reserves had

declined to USD31.9bn in July 2015, from USD34.9bn

in December 2014.

Table 2: Economic indicators 2011 2012 2013 2014 2015f

GDP (USD'bn) 411.7 461.0 515.0 568.5 581.0

GDP growth (%) 7.4 6.6 5.4 6.2 3.0

GDP per capita (USD) 1,015.8 1,030.2 1,055.8 1,091.6 1,144.0

Debt to GDP (%) 18.0 19.0 11.0 10.5 8.4

Oil price (USD per barrel) 87.0 86.5 91.2 85.6 50.7

Avg.inflation rate (%) 10.8 12.2 8.5 8.1 9.7

Avg. exchange rate (NGN/USD) 155.9 158.8 159.3 165.1 197.0

Sources: NBS, CBN and World Bank.

In further support of financial stability, the harmonised

cash reserve requirement (“CRR”) on public and private

sector deposits was (in November) further reduced to

20%, from 25% in September. In addition, CBN has cut

the prime lending rate for the first time in around six

years to 11% from a high 13%, in order to increase

lending to the real sectors of the economy, including

infrastructure, agriculture, solid minerals and power.

The relaxation of both the CRR and the interest rate is

expected to increase liquidity in the economy, which

declined as a result of reduced government spending

and the introduction of the Treasury Single Account for

all government entities; the latter having been

introduced to reduce leakages and improve

accountability.

Inflation rate eased for the first time in eleven months,

falling to 9.3% in October 2015 from 9.4% the previous

month (a two-year high), mainly due to slower increases

in foodstuff prices and other consumables. Although,

the inflation rate averaged 8.1% in 2014, it has

consistently risen in 2015, underpinned by the sustained

depreciation of the Naira and the country’s persistent

current account deficits.

Short to medium term economic prospects in Nigeria

are mixed. On the one hand, the stable political

environment and strong investor interest in the economy

are positive. However, the impact of lower oil prices is

being felt acutely in 2015 in terms of constrained

government spending and the effect of oil revenues

across the economy, with overall GDP growth expected

to fall to around 3% in 2015. This will delay efforts to

reduce the country’s infrastructure deficiencies, while

the challenges of erratic power supply and security

concerns are likely to persist (especially in parts of the

North). However, the youthful urban population, with

the increased spending capacity bodes well for future

growth, and thus, GDP growth is expected to be in line

with the 6% attained over the last decade.

Income and expenditure

A 5-year historical financial synopsis is reflected at the

end of this report and brief comment follows hereafter.

The financial statements are based on the Audited

Financial Statement for the years 2009-2013 These

statements are prepared using the cash basis of

accounting and are divided into distinct operating and

capital income/expenditure statements. The Auditor

General of Cross River State gave an unqualified audit

opinion on the results for F13.

Total revenue peaked at a high N58.7bn in F11, since

then, total revenue has evidenced successive declines

(albeit marginal) of N55.2bn in F14 (F13: N56.2bn).

The initial growth was spurred by much higher statutory

receipts, but such receipts have declined as a result of

the State’s loss of its designation as an oil producing

State (including the 13% derivation fee receivable).

Added to this, the sustained fall in global oil prices

since 2H F14 resulted in lower statutory receipts of

N41.8bn in F14 (F13: N44.2bn). Notwithstanding the

relatively small impact of the drop in oil prices on

revenue in F14, a much greater impact is expected in

F15 and F16 as oil prices have remained fluctuated

around the USD40/barrel mark, well below the revised

FGN benchmark of USD53/barrel and the highs of over

USD100/barrel reported in early 2014. To cushion the

impact of reduced revenues on governance, the State

has put in place a number of cost rationalisation

measures. Key amongst these is a reduction in the cost

of government through strict compliance with budgeted

expenditure levels and the elimination of non-essential

expenditure such as foreign travel.

Table 3: Operating

cash flow (Nm) F13 F14

Budget

F14

%

achieved

Total IGR 12,002 13,422 27,840 48.2

Statutory allocation 44,246 41,790 50,900 82.1

Total recurrent inc. 56,248 55,211 78,740 70.1

Personnel costs (21,673) (22,020) (23,878) 92.2

CRF Charges (4,972) (5,972) (13,677) 43.7

Overhead costs (14,176) (11,533) (15,310) 75.3

Total recurrent exp. (40,821) (39,526) (52,865) 74.8

Operating surplus 15,427 15,685 25,875 60.6

Borrowings/others 49,503 26,179 87,810 29.8

VAT proceeds 8,025 8,103 7,167 113.1

Loan Repayment (935) (259) (804) 32.2

Capital expenditure (68,974) (63,641) (122,938) 51.8

Cash & equiv. 3,046 (13,933) (2,889) n.a

IGR performance has remained strong over the review

period, posting 79% growth over the three-year period

to N12.7bn in F12. Following a slight decline in F13

(attributed to lower tax income), IGR performance

rebounded to register at a peak of N13.4bn in F14. IGR

has been underpinned by income taxes, which has

comprised over 50% of IGR in most of the years under

review. Income tax rose to N6.7bn in F14 from N5.5bn

in F13, evidencing some successes in the revenue

generation policies and stimulatory economic activities.

An analysis of tax income reveals limited concentration

risk present as the top ten contributors amounted to a

cumulative N1.7bn (13% of IGR). Further contributing

to growth, other sources of IGR (including fines and

fees, rent/rates, licenses, earnings and sales of

government property) almost doubled to N2.6bn in F15

as the State stepped up the enforcement of rules and

regulations. In contrast, non-recurring revenue from

sundry receipts and refunds amounted to a lower N4bn,

while interest and investment income remained

negligible at N116m (F13: N228m).


As a result of cost rationalisation measures, total

recurrent expenditure declined by N1.3bn to N39.5bn in

F14. This was spurred by a 19% decrease in overhead

costs to N11.5bn, following the implementation of

stricter expenditure control policies and the reduction of

wastages in the system through the elimination of non-

essential expenditure. However, in contrast to the cost

savings achieved in overheads, consolidated revenue

fund charges increased by N1bn to N6bn following

higher payments made to retired staff and political

appointees. Similarly, a small N347m increase to N22bn

was reported in personnel costs, albeit comparing

favourably to the excessive increases in previous years.

Cross Rivers attributed the stable staff costs to the

implementation of regular staff audits and a reduced

employment in non-essential positions. Nevertheless,

this translated to a higher personnel costs to expenditure

ratio of 56% (F13: 53%) owing to the overall decline in

total expenditure. Relative to income the staff

expenditure ratio edged higher to 40% in F14. The high

personnel cost ratio is of concern as it has registered

above the GCR sustainable benchmark of 35% in each

of the last six years, and at current levels indicates that

there is limited scope to cut expenditure further without

major retrenchments, which may be politically

unpopular. In the absence of such action, however,

Cross River’s financial flexibility remains constrained,

with few available funds for developmental purposes.

Notwithstanding the improved IGR, it still remains well

below what is recurred to cover personnel costs. This

has entrenched the State’s reliance on the FGN for

financial sustenance, with statutory receipts comprised

an averaged 79% over the last five years (F14: 76%).

On the back of this support, Cross River State has

consistently reported operating surpluses over the

review period. With surplus remaining flat on N15.7bn

in F14, (and much lower than the N26.3bn reported in

F11), the surplus margin rose to 28.4%, from 27.4% in

F13.

In an effort to accelerate the development of

infrastructure, the State has maintained a high level of

capex spend over the last five years. Although, capex

spend registered a lower N63.6bn in F14 from N69bn in

F13, it remained much higher than previous years. Since

expanding its capex programme in F11, the State has

expended a cumulative N238.8bn on social and

commercial infrastructure. As in previous years, a

significant N46.1bn (73% of capex) was expended in

the provision of economic infrastructure, including

transportation, agriculture and power. The remainder

was expended on social infrastructure, environment and

urban renewal and administrative services to the

citizens. The industrialisation agenda embarked upon

has been largely supported by the robust surpluses, and

significant capital receipts. Notwithstanding the

progress in attaining its long term developmental

targets, sustained funding remains crucial for further

progress.

Funding profile

The value of Cross River’s assets declined to N11.1bn

at FYE14, from N18.9bn at FYE13. However, this did

not arise from a decrease in the real value of assets, but

rather from a change in accounting procedures, whereby

fixed assets are expensed in the year of acquisition.

Cash and equivalents registered at a lower N6.1bn at

FYE14 from N9.5bn previously, underlying the

increased utilisation of cash resources to fund capex.

Nevertheless, this represented a higher 55% of asset at

FYE14 (FYE13: 50%), based on the lower assets base.

Cash is held solely in Naira denominated current

accounts placed with commercial banks in Nigeria.

Other current assets reported a 3% growth to N5bn at

FYE14, with the bulk representing advances.

The State drew down on its entire investment portfolio

(recognised as the future generation/reserve fund)

during F14, with a negative balance reported at year-

end. Assets in the portfolio mainly comprised bonds and

money market securities that are supposed to be held in

trust by independent trustees and managed by

recognised fund managers. GCR is yet to receive the

most recent copy of the fund statement from the State in

this regard.

While details of the State’s borrowings are not reported

in the financial statements, schedules provided by the

State indicate an increasingly elevated debt profile. In

this regard, debt has risen by a net N52.5bn over the

five-year review period to N74.5bn at FYE14, with the

bulk incurred to sustain the industrialisation drive and to

augment dwindling statutory receipts. Of the total debt

outstanding at FYE14, a significant N48.8bn/65% of

debt relates to internal loans, mainly comprising

commercial bank loans, with the largest loan provider

being First Bank Plc at N47.7bn/64% of debt at FYE14.

Other loans are much smaller and are provided by 3

counterparties. Cognisance is taken of the fact that the

State issued N8bn fixed rate bonds in 2Q F15, which

would further raise debt, although, this is expected to

amortise through semi-annual payments until full

redemption in 2022.

Table 4: Total debt (Nm) FYE13 FYE14

Internal loans 40,493 48,783

Ecobank Plc. 343 709

First Bank Ltd. 37,437 47,686

Zenith Bank 814 356

Fidelity Bank 1,303 -

Enterprise Bank 247 -

Diamond Bank 349 32

Foreign loans 18,929 25,762

Total loans 59,422 74,545

Foreign loans rose by a net N6.8bn to N25.8bn at

FYE14. This was due to a mix of new loans incurred as

well as the impact on the Naira depreciation on the local

currency value of the loans. The bulk of these loans are

provided by developmental agencies (including the

International Development Association and the African

Development Bank), are all USD-denominated and

generally reflect concessionary interest rates of around

1% per annum, utilised to finance development in the

State.


Debt and liquidity metrics

As a consequence of the rise in debt, the gross debt to

income ratio rose further to 135% at FYE14 (FYE13:

106%), while the net debt to income ratio increased to

124% (FYE13: 89%). Similarly, liquidity metrics were

also constrained as days cash on hand declined to 56

days (F13: 85 days), following the increased utilisation

of cash reserves to finance capex.

Future prospects and forecasts

The following operating and capital budget is based on

forecasts provided by Cross River State, as approved by

the State Assembly under the 2015 Appropriation Act.

With projections christened “Budget of Transition”, it

has been prepared on the basis of a number of

assumptions, in line with FGN benchmarks. These

include an average annual crude oil production of 2.28

million barrels per day, an average oil price of USD53

per barrel, and a capex-recurrent expenditure ratio of

60%:40%, in order to quicken the pace of development

in the State.

In line with previous years, the cardinal point of the

forecasts is the continued utilisation of the Medium

Term Budgetary Framework (“MTBF”), which has

formed the basis for the compilation and

implementation of budgets. The use of the MTBF has

enabled effective policy introduction, implementation,

evaluation and monitoring of all developmental

programmes across the State. This has enabled the State

to efficiently utilise and allocate limited resources

across the various sectors, including, transportation,

health and education that have witnessed significant

improvements over the last few years.

Positively, a number of programmes in the agricultural

sector have become fully operational with direct

benefits to the indigenes in form of employment and

wealth creation opportunities, while also providing a

boost to the local economy. Specifically, the recently

established (under the FGN agricultural transformation

scheme) Growth Enhancement Scheme has provided

subsidised fertilizers and improved seedlings to farmers

to boost maize, rice and cassava production in the State.

Similarly, the agro-business and entrepreneurship centre

(Songhai Farm) in Abi local government area

commenced operations with the planting of pineapple,

pepper and several other crops. The hostel for students

was also completed, while a number of the pioneer

students (who were previously sent to train at the main

Songhai centre in Porto Novo, Benin Republic) now

fully engaged at the farm settlement. The centre has

equipped a number of local farmers with the necessary

knowledge and skills for modern farming, while also

developing agricultural capacity within the State.

A tourism policy document and regulatory framework

for the standardisation and licensing of tourism

operators in the State has been completed and its

implementation commenced in line with global best

practices. In addition, the State has begun massive

restructuring of tourism sites to upgrade facilities and

expand the tourism value-chain.

Furthermore, under the joint funding of the State and

Bank of Industry, a significant number of small scale

enterprises enjoyed credit facilities ranging from

N0.05m to N0.25m, while CBN Funded

Entrepreneurship Development Centre helped expand

the frontiers of a private sector-led economy, training a

number of prospective entrepreneurs and supporting

others to either start up or expand their businesses.

According to the State, the continued implementation of

these policies/programmes over the medium term would

help raise the level of the IGR collections to sustainably

cover recurrent expenditure, enabling federal receipts to

be channelled towards developmental programmes.

In view of the expected increase in economic activities,

which should boost tax income, forecasts indicate IGR

will almost double to N25bn in F15. This is premised on

the continued implementation of stricter enforcement of

rules and regulations and the restructuring of Ministries,

Departments and Agencies to function efficiently and

generate revenue for the State. In contrast, on the back

of the sustained fall in oil prices, statutory allocations

are budgeted to decline by 14% to N36bn. Nevertheless,

based on the aggressive IGR target, higher total revenue

of N61bn is expected for F15.

Table 5: Operating Budgets

(N'bn) Actual F14 Budget F15 % Change

Total IGR 13 25 86.6

Statutory allocation 42 36 (13.7)

Total recurrent inc. 55 61 10.7

Total recurrent exp. (40) (55) 39.7

Operating surplus 16 6 (62.4)

Other capital receipts 34 50 45.7

Borrowings 0 14 n.a

Capital expenditure (64) (73) 14.1

Cash & equiv. (14) (3) n.a

Recurrent expenditure is budgeted to rise to around

N55bn in F15, in line with the expected increase in

economic activities, given the implementation of the

various revenue generation programmes. A portion of

expenditure includes interest and principal repayments

on existing obligations, including the N8bn fixed rate

bond. As a consequence of the higher expenditure, a

small operating surplus of N6bn is expected in F15

(F14: N16bn). The State has budgeted to continue with

its aggressive infrastructural development programme,

and a higher capex spend of N73bn is proposed for F15

(F14: N63.6bn). This will be funded from the surplus,

borrowings of N14bn (including the N8bn bond, already

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

0.010.020.030.040.050.060.070.080.0

2010 2011 2012 2013 2014

Debt: Income Ratio

Gross debt Gross debt: Income (RHS)Net debt: Income (RHS)

N'bn %


issued in May 2015) and capital receipts (including

grants and VAT receipts) of N50bn.

As at 3Q F15, Cross River State had benefitted from the

debt restructuring programme introduced by the FGN as

part of its palliative measures to address the decline in

statutory receipts. In this regard, FGN bonds of N33.8bn

have been substituted for existing commercial

obligations (representing 82% of bank loans),

effectively extending the maturities of these debt

obligations for 15-20 years, and thereby reducing annual

debt service costs.

Following the debt restructuring exercise, gross debt

would likely remain around the N70bn mark at FYE15,

given smaller payments on the loans, with the gross debt

to income ratio estimated to remain high at around

110% at FYE15.

Bond rating considerations

In performing the above analysis, GCR has considered

those factors impacting the general creditworthiness of

Cross River State i.e. its Issuer credit rating. However,

structural and other enhancements have been (or are

expected to be) utilised to improve the credit risk of a

specific Issue(s) under the Bond programme. In respect

of the above, apart from the scenario of a partial or full

guarantee, GCR’s approach to such Issue ratings is to

utilise the issuer rating as a base from which credit

enhancements are then considered.

N8bn Fixed Rate Bond

The Series 1 Fixed Rate Bond (issued in May 2015)

carries a 7-year maturity (2015–2022), bearing a coupon

rate of 17%. Based on the revised amortisation

schedule, principal redemption and coupon payments

totalling about N999m will be made semi-annually

(around N2bn annually), and will be payable in arrears

up to and including the maturity date. The primary

source of repayment on interest and principal of the

bonds issued is via a Sinking Fund. The Sinking Fund is

fully backed by an ISPO, approved by the Ministry of

Finance. With regards to both interest and principal

payments, monthly deductions of N169m will be made

from the State’s share of the Statutory Allocation from

the Federation Account throughout the tenor of the

bond. This equates to ring-fenced debt servicing receipts

of over N2bn in a 12-month period. Given this, the

ISPO receipts fully cover both the interest and principal

payments of the Series 1 bond. In addition, investment

income is expected to accrue on balances in the Sinking

Fund Account through the tenor of the bond.

According to the trustees, after accounting for bank

charges, management fees and refunds to the

government, there was an accrual of N665m in the

sinking fund account as at end September, 2015.

Table 6: Revised Amortisation schedule (Series 1: N8bn Fixed Rate

Bond)

Details of the bond

Series 1 bond N8,000m Interest Rate: 17% p.a. fixed Repayment Frequency per

annum:

2 (Semi-Annually)

Original Term (months): 84 No of payments: 14 ISPO Amount per Month: N168.9m Amortisation schedule (Nm)

Year Beg Payment Interest Principal End

0 8,000

1 8,000 1,997 1,333 665 7,335

2 7,335 1,997 1,215 782 6,553

3 6,553 1,997 1,076 921 5,632

4 5,632 1,997 913 1,084 4,548

5 4,548 1,997 721 1,276 3,271

6 3,271 1,997 495 1,503 1,769

7 1,769 1,997 229 1,769 0

Total - 13,982 5,982 8,000 -


Cross River State Government of Nigeria

(Naira in Millions except as Noted)

Income Statement 31 December 2010 2011 2012 2013 2014

Income tax 4,632.4 5,899.5 8,589.3 5,526.4 6,693.9

Other internally generated revenue 742.8 1,261.3 1,745.5 1,476.8 2,625.2

Interest and investment income 160.5 177.3 147.0 228.3 115.9

Miscellaneous revenue 2,150.4 1,821.5 2,252.8 4,770.6 3,986.5

Total internally generated revenue 7,686.1 9,159.6 12,734.6 12,002.2 13,421.6

Statutory allocation 27,600.5 49,574.6 45,231.9 44,246.2 41,789.6

Total income 35,286.6 58,734.2 57,966.5 56,248.4 55,211.1

Personnel emoluments (12,259.2) (15,454.8) (19,254.0) (21,673.3) (22,020.3)

CRF Charges (3,239.3) (4,455.4) (5,800.4) (4,971.9) (5,972.4)

Overhead costs (9,321.5) (12,565.1) (14,577.8) (14,176.0) (11,533.4)

Operating surplus (deficit) 10,466.6 26,259.0 18,334.3 15,427.2 15,685.0

Transfer (to)/from capex and development fund (5,661.1) (7,528.4) (18,652.1) (28,597.0) (25,459.8)

Consolidated revenue fund adjustments (5,296.8) (7,605.7) (3,762.0) (935.5) (258.5)

Transfer to/ (from) consolidated revenue fund (491.3) 11,124.9 (4,079.8) (14,105.2) (10,033.3)

Capital development fund

Opening balance (1,942.0) (660.9) (16,445.7) (17,631.9) (481.0)

Loans/ overdraft 469.2 7,457.8 13,382.0 26,079.7 0.0

Vat proceeds and other 19,102.3 20,318.2 21,836.0 31,448.0 34,282.1

Transfer (to)/ from consolidated revenue fund 5,661.1 7,528.4 18,652.1 28,597.0 25,459.8

Capital expenditure (23,951.5) (51,089.3) (55,056.3) (68,973.8) (63,641.2)

Closing balance (660.9) (16,445.7) (17,631.9) (481.0) (4,380.3)

Balance Sheet

Consolidated revenue fund 23,433.7 34,558.6 30,478.8 16,373.5 6,340.2

Capital development fund (660.9) (16,445.7) (17,631.9) (481.0) (4,380.3)

Total public funds 22,772.8 18,112.9 12,846.9 15,892.5 1,960.0

Non-interest bearing liabilities 3,091.4 17,156.0 10,125.8 2,970.2 9,119.6

Total liabilities

25,864.2 35,268.9 22,972.7 18,862.7 11,079.5

Investments 4,211.9 4,811.7 4,886.8 4,522.8 (9.2)

Cash and cash equivalents 9,901.8 22,451.8 13,288.3 9,484.1 6,086.6

Other current assets 11,750.5 8,005.4 4,797.6 4,855.8 5,002.1

Total assets 25,864.2 35,268.9 22,972.7 18,862.7 11,079.5

Total loans* 22,059.9 30,236.4 43,262.3 59,422.1 74,544.5

Internal loans

5,571.3 13,439.9 25,708.1 40,493.0 48,783.0

External loans 16,488.5 16,796.5 17,554.2 18,929.1 25,761.5

Key Ratios

Efficiency Total revenue growth 12.8 66.4 (1.3) (3.0) (1.8)

IGR growth 8.2 19.2 39.0 (5.8) 11.8

Total expenditure growth (including capex) (11.0) 71.3 13.3 16.0 (6.0)

Personnel cost growth 9.4 26.1 24.6 12.6 1.6

Capex growth (17.6) 113.3 7.8 25.3 (7.7)

IGR : Total revenue

21.8 15.6 22.0 21.3 24.3

Non IGR : Total revenue 78.2 84.4 78.0 78.7 75.7

Personnel cost: Total expenditure 49.4 47.6 48.6 53.1 55.7

Operating surplus/(loss) : Total income 29.7 44.7 31.6 27.4 28.4

Capex : Total income 67.9 87.0 95.0 122.6 115.3

Gearing & Liquidity Days cash on hand 145.6 252.3 122.4 84.8 56.2

Total interest bearing debt : total income 62.5 51.5 74.6 105.6 135.0

Net interest bearing debt : total income 34.5 13.3 51.7 88.8 124.0

Total interest bearing debt : total assets 85.3 85.7 188.3 315.0 672.8

Net interest bearing debt : total assets 47.0 22.1 130.5 264.7 617.9

*Total debt left off balance sheet


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