Fitch Revises Kaduna's Outlook to Stable on Sovereign Action; Affirms at 'B'

(The following statement was released by the rating agency)
Fitch Ratings-Milan-12 October 2020:
Fitch Ratings has revised the Outlook on Kaduna State's Long-Term Foreign- and
Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and
affirmed the IDRs at 'B'.

A full list of rating actions is below.

Under EU credit rating agency (CRA) regulation, the publication of
International Public Finance 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.

Following the recent revision of the Outlook on Nigeria's IDRs (see Fitch
Revises Nigeria's Outlook to Stable, Affirms at 'B' dated 30 September 2020 on
www.fitchratings.com), we have taken similar rating action on Kaduna as it is
rated at the same level as the sovereign and its Outlooks move in tandem with
those on the sovereign.

While Nigerian local and regional governments' (LRG) most recently available
issuer data may not have indicated performance impairment, material changes in
revenue and cost profiles are occurring across the sector and likely to worsen
in the coming weeks and months as economic activity suffers and government
restrictions are maintained or broadened. Fitch's ratings are forward-looking
in nature, and we will monitor developments in the sector for their severity
and duration, and incorporate revised base- and rating-case qualitative and
quantitative inputs based on performance expectations and assessment of key
risks.

The next scheduled review date for Kaduna will take place in 2021.
Key Rating Drivers
HIGH

Sovereign Cap

As per Fitch's rating criteria, Kaduna cannot be rated above the sovereign and
its Outlooks reflect those on the sovereign. Fitch considers that the national
government's role remains predominant in Nigerian intergovernmental relations,
as it controls the equalisation mechanism enacted through the system of
transfers of oil-related revenue to states. These constitute over 50% of
Kaduna's operating revenue.

LOW

Risk Profile: Vulnerable

Fitch assesses Kaduna's risk profile at 'Vulnerable', which combines five
factors at 'Weaker' (revenue robustness and adjustability, expenditure
sustainability, liabilities and liquidity robustness and flexibility) and one
factor at 'Midrange' (expenditure adjustability). The 'Vulnerable' risk
profile reflects a very high risk of an unexpected weakening of Kaduna's
ability to cover its debt service needs over the rating horizon.

Debt Sustainability: 'bb' category

In its rating scenario of a prolonged economic downturn, Fitch expects
Kaduna's debt-to-operating balance (payback) ratio to sharply increase around
23x (2019:12x) after the full disbursement of the USD350 million loan from the
World Bank. Under this scenario, Fitch expects some volatility in the payback
ratios in 2020-2021 as a consequence of reduced oil-related transfers from the
Federal Government of Nigeria (FGN) and increased operating spending to cope
with the pandemic. -The fiscal debt burden - measured by net adjusted
debt-to-operating revenue - could move above 300%, while the state will
continue to have a good debt servicing coverage ratio above 1.5x.

Kaduna is classified as a type B LRG by Fitch, as it covers debt service with
its operating balance. Kaduna's fast-growing 8.2 million residents and a
traditionally strong primary sector contribute to weak socio-economic
standards. Dominant agricultural and service sectors drive the economy, but
Kaduna's development plan focuses on the state's rich mineral resources by
attracting foreign investors to key industrial projects.
Derivation Summary
Fitch assesses Kaduna's Standalone Credit Profile (SCP) at 'b', reflecting a
combination of a vulnerable risk profile assessment and a 'bb' assessment of
debt sustainability. The SCP also factors in Kaduna's high debt burden
compared with international peers, in particular South-American states and
provinces. Fitch does not apply any asymmetric risk or ad-hoc support from the
central government and assesses intergovernmental financing as neutral to
Kaduna's ratings. The 'B' IDR reflects Kaduna's own payment capacity, while
debt-service support from the central government through deductions from the
statutory allocation is factored into the debt framework.
Key Assumptions
Qualitative Assumptions and assessments and their respective change since the
last review on 18 September 2020 and weight in the rating decision:

Risk Profile: Vulnerable, unchanged with low weight

Revenue Robustness: Weaker, unchanged with low weight

Revenue Adjustability: Weaker, unchanged with low weight

Expenditure Sustainability: Weaker, unchanged with low weight

Expenditure Adjustability: Midrange, unchanged with low weight

Liabilities and Liquidity Robustness: Weaker, unchanged with low weight

Liabilities and Liquidity Flexibility: Weaker, unchanged with low weight

Debt sustainability: 'bb' category, unchanged with low weight

Support: n/a

Asymmetric Risk: n/a

Sovereign Cap: Yes, raised with high weight

Quantitative assumptions - issuer specific

Fitch's rating case scenario is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk stresses. It is
based on the 2015-2019 figures and 2020-2024 projected ratios. The key
assumptions for the scenario include:

- 4.5% CAGR in operating revenue on average in 2020-2024, versus 8% in
baseline scenario;

- 6% CAGR in operating spending on average in 2020-2024 versus 7.5% in
baseline scenario;

- 1.5% cost of debt in 2020-2024.

Quantitative assumptions - sovereign related

Figures as per Fitch's sovereign actual for 2019 and forecast for 2022,
respectively:

- GDP per capita (US dollar, market exchange rate): 2,001.2; 2,279.0

- Real GDP growth (%): 2.2; 3.0

- Consumer prices (annual average % change): 11.4; 13.0

- General government balance (% of GDP): -3.6; -4.5

- General government debt (% of GDP): 26.7; 30.5

- Current account balance plus net FDI (% of GDP): -3.8; 0.8

- Net external debt (% of GDP): 4.1; 6.5

- IMF Development Classification: EM

- CDS Market Implied Rating: n/a
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating
action/downgrade:

- A downgrade of the sovereign would lead to corresponding rating action on
Kaduna.

- A payback ratio above 25 years and a weakening amortisation profile leading
to a debt service coverage ratio decreasing towards 1x, could result in a
downgrade.

-A prolonged COVID-19 impact and much slower economic recovery lasting until
2025 would put pressure on net revenues. Should Kaduna be unable to
proactively reduce expenditure or supplement weaker receipts from increased
central government transfers, this could lead to a downgrade.

Factors that could, individually or collectively, lead to positive rating
action/upgrade:

- Fitch deems an upgrade of Kaduna's ratings as unlikely due to the state's
weak debt metrics. However, a higher overall assessment of its risk profile
and a payback below five years on a sustained basis would be positive for
Kaduna's ratings, subject to a sovereign upgrade.

COMMITTEE MINUTE SUMMARY

Committee date: 9 October 2020

There was an appropriate quorum at the committee and the members confirmed
that they were free from recusal. It was agreed that the data was sufficiently
robust relative to its materiality. During the committee no material issues
were raised that were not in the original committee package. The main rating
factors under the relevant criteria were discussed by the committee members.
The rating decision as discussed in this rating action commentary reflects the
committee discussion.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and
Infrastructure issuers have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive direction)
of three notches over a three-year rating horizon; and a worst-case rating
downgrade scenario (defined as the 99th percentile of rating transitions,
measured in a negative direction) of three notches over three years. The
complete span of best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit
ratings are based on historical performance. For more information about the
methodology used to determine sector-specific best- and worst-case scenario
credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
Summary of Financial Adjustments
Contractors' and pension arrears reported under Other Fitch Classified debt

Capex figures adjusted to mirror Fitch's estimated cash-like data

Kaduna's cash at year-end is considered restricted as the working capital
(accounts receivables less accounts payables) is negative.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit
relevance is a score of '3'. This means ESG issues are credit-neutral or have
only a minimal credit impact on the entity, either due to their nature or the
way in which they are being managed by the entity. For more information on
Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Kaduna has an ESG Relevance Score of 4 for Energy Management due to problems
with electricity and dependency on oil-related transfers, which has a negative
impact on the credit profile, and is relevant to the ratings in conjunction
with other factors.

Kaduna has an ESG Relevance Score of 4 for Human Rights and Political Freedoms
due to the presence of conflicts in the region, which has a negative impact on
the credit profile, and is relevant to the ratings in conjunction with other
factors.

Kaduna has an ESG Relevance Score of 4 for Human Development, Health and
Education as the majority of the population lives below the poverty line,
which has a negative impact on the credit profile, and is relevant to the
ratings in conjunction with other factors.

Kaduna has an ESG Relevance Score of 4 for Political Stability and Rights as
political divisions leading to unpredictable policy shifts with low budget
predictability, which has a negative impact on the credit profile, and is
relevant to the ratings in conjunction with other factors.
Kaduna State; Long Term Issuer Default Rating; Affirmed; B; Rating Outlook
Stable
----; Local Currency Long Term Issuer Default Rating; Affirmed; B; Rating
Outlook Stable
----; National Long Term Rating; Affirmed; A+(nga); Rating Outlook Stable

Contacts:
Primary Rating Analyst
Chiaramaria Mozzi,
Associate Director
+39 02 879087 231
Fitch Ratings Ireland Limited Sede Secondaria Italiana
Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8
Milan 20123

Secondary Rating Analyst
Pierre Charpentier,
Associate Director
+33 1 44 29 91 45

Committee Chairperson
Vladimir Redkin,
Senior Director
+7 495 956 2405

Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email:
athos.larkou@thefitchgroup.com

Additional information is available on www.fitchratings.com

Applicable Criteria
International Local and Regional Governments Rating Criteria (pub. 11 Sep
2020) (including rating assumption sensitivity)
(https://www.fitchratings.com/site/re/10134403)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10139309)
Solicitation Status
(https://www.fitchratings.com/site/pr/10139309#solicitation)
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(https://www.fitchratings.com/site/pr/10139309#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10139309#endorsement-policy)

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