FG’s credit ratings for Eurobonds to attract foreign investors — Adeseyoju
Mr. Abimbola Adeseyoju is the Managing Director/CEO, DataPro Limited. In this interview, he speaks on why Nigeria got credit ratings for its international bonds and how DataPro assigns credit ratings to financing agencies.
The Nigerian government had to get Fitch and S&P to assign ratings on its Eurobonds but raises bonds in the local market every month, without being rated. Why is this so?
Yes, for naira-denominated instruments issued by the Nigerian government, they implicitly carry the highest credit rating possible, being ‘AAA’, as the full faith and credit of the Federal Government of Nigeria (FGN) indicates the presumably “risk-free” premium on those instruments, as the federal government has full authority to print naira as a way of repayment of the debt, in the extreme situation that it is not able to generate revenue to redeem the bonds.
While this should not be the case, as there are consequences for printing money, the fact that the government is the issuer of naira provides comfort on its ability to redeem all naira obligations.
However, it is different for foreign currency-denominated debts, as investors would need the credit rating as a basis of evaluating the capacity of the Federal Government of Nigeria to generate foreign currency revenues to redeem its obligations under such debt programmes.
Your firm recently released reports on the ratings reviews of some firms with Zenith Bank and Total Nigeria Plc (Total Energies) assigned ‘AA-’ and ‘A-’ ratings. What does this mean for the market?
Credit rating is an independent, thorough assessment of the credibility of an entity and its ability to meet obligations over a period of time. In our case, our ratings are valid for a 12 calendarmonth period; even so we monitor and change the ratings either upward or downward, as may be required, during the rating validity period.
Each rating has its full meaning, and we ensure to define the meaning of this rating construct in our report. For instance, the ‘AA-’ rating of Zenith Bank, which is two notches below the sovereign rating of ‘AAA’ indicates that Zenith Bank has a low risk, highlighting its strong financial strength, operating performance, governance, and capitalization, amongst other factors which suggest its ability to meet obligations as and when due over the next 12 months validity period of the rating.
The rating, of course, reflects our independent and thorough assessment of the bank, with focus on local currency capacity over the next 12 months. While it is neither a solicitation of business or investment for Zenith Bank, it is a summary review report that can guide different stakeholders in appraising the institution. Indeed, it is also a very useful self-assessment report for the management and board.
There seems to be some judgements in credit ratings beyond the science, what are these fundamentals?
Credit ratings are a blend of quantitative and qualitative metrics across different constructs, and it is important to state that the assessment is more forward-looking. Thus, we look at issues ranging from financial performance, competitive positioning, management capacity, governance and regulatory compliance to issues bordering on the capital level and ability to generate both internal and external capital as may be required; operational excellence including risk management practices, and control systems that may expose the business to operational risks.
So, while we have a robust framework that helps to objectively assess various components of the risk elements and ensure its closeness to science as much as possible, there is a faint blend of judgement that may arise from the qualitative factors. However, we moderate this judgement with the rating process controls, including the fact that the rating on any entity or instrument is the decision of a thorough review of the rating committee and not an individual analyst.
Oftentimes, you assign a different rating on an entity (issuer) and another on its debt instrument (issue). Why is this so?
It is important to distinguish the difference in approach between credit rating on an entity (the issuer) and ‘credit rating’ on an entity’s instrument (issue) as the analysis of credit rating on a debt instrument is purely based on the ability of the issuing entity to generate adequate cash-flow and sustain relevant fundamentals critical to meeting all the obligations and covenants of the debt notes through till maturity.
However, the analysis that goes into an entity rating is much broader, and considers overall credibility of the institution and ability to meet short-and longterm obligations, including its capacity to at least maintain the current fundamentals that define its going concern, market share, competitiveness and business sustainability, irrespective of current and emerging risks in the business and operating environment.
Credit rating seems to be an elite service, as smaller institutions, including microfinance banks, do not have credit ratings. How can this be addressed?
It is not an elite service, but I presume the low level of education, low level of enforcement and affordability of the small and medium-scale enterprises have limited the penetration of credit ratings.
We are working on a number of initiatives to deepen the credit rating market and make the service accessible to MSMEs. Our upcoming virtual conference, which we are running in partnership with the Association of Issuing Houses of Nigeria (AIHN), is to further educate the market on the imperatives of credit rating for a post-COVID-19 economic recovery and how best to deepen our market and stimulate capital flows within the Nigerian economy.
Have you had cause downgrade the ratings to of institutions under your coverage, and when that happens, what is the expected reaction of the market?
Yes, we have many times downgraded the ratings of some of the entities under our coverage for different reasons, including macro, industry and companyspecific factors. When we have such rating action on an entity, it often weakens the ability of the entity to raise capital, as it is a caveat for investors to take caution on such an entity, given that a rating downgrade is an indication of deterioration in the fundamentals of the entity.
This does not mean that the entity cannot meet obligation, rather it shows weakness in its ability. For instance a downgrade from ‘A-’ rating to ‘BBB+’ does not mean investors cannot invest in the securities issued by the entity, as ‘BBB+’ is still a good investment grade rating, but it only signals weakness in the strength of the institution. Such a rating downgrade may mean that investors should demand a higher interest rate when lending to such an entity, as against when it had a higher credit rating of ‘A’.