Moody's Investors Service on Thursday assigned a provisional senior unsecured (P)B1 rating to the Nigeria's proposed $1 billion eurobond issuance termed Global Medium Term Note (GMTN) programme.
The provisional (P)B1 rating is based on the preliminary prospectus dated February 2. Moody's will assign a definitive rating upon receipt of the final documentation.
RATINGS RATIONALE
According to the transaction documents provided to Moody's, the Notes under the proposed GMTN programme are direct, general, unconditional, unsecured and unsubordinated obligations of the Federal Government of the Republic of Nigeria (the issuer) and will rank pari passu with all other unsecured external debt obligations of the issuer. The proposed Notes are governed by English law and the terms of the notes contain a negative pledge provision. The (P)B1 rating on Nigeria's proposed GMTN programme mirrors the Federal Government of Nigeria's B1 (stable outlook) issuer rating.
Nigeria's economic growth and US dollar earnings are likely to gradually improve in 2017, supported by a recovery in oil production and oil prices. The economy is also likely to see further benefits arising from a more timely implementation of the 2017 budget and, in particular, a higher realisation of capital spending on infrastructure. Although militant activity in the Niger Delta is set to wane following ongoing negotiations and the resumption of payments from the government, it will remain a latent threat to the expected recovery of the economy. The existing scarcity of dollars -- exacerbated by the soft capital controls imposed by the Central Bank of Nigeria -- is likely to continue to negatively affect important sectors of the economy especially in services and manufacturing sectors even in 2017. We do not expect the current policy mix to significantly change over the short term but a gradual easing of restrictions is possible as foreign currency receipts improve with rising oil production.
Nigeria's issuer rating is constrained by the weakness of Nigeria's institutional framework, especially in terms of the rule of law, government effectiveness and control of corruption, which has had a substantial impact on economic growth and government fiscal strength. However, the outcome of the 2015 presidential election has the potential to deliver gradual and credit-positive institutional improvements over the medium term. Additionally, Nigeria is exposed to political risks arising from both the conflict with Boko Haram and recurrent attacks on oil infrastructures in the Niger Delta.
WHAT COULD CHANGE THE RATING UP
Positive pressure on Nigeria's issuer rating would be exerted by: 1) successful implementation of structural reforms by the Buhari administration, in particular with respect to public resource management and the broadening of the revenue base; 2) a significant improvement in institutional strength with respect to corruption, government effectiveness, and the rule of law; 3) the rebuilding of large financial buffers sufficient to shelter the economy from a prolonged period of oil price and production volatility.
WHAT COULD CHANGE THE RATING DOWN
Nigeria's B1 issuer rating could be downgraded in case of 1) failure to implement revenue reform that might lead to a further accumulation of government debt; 2) a greater-than-anticipated deterioration in the government's balance sheet; 3) material delay in implementing key structural reforms, especially in the oil sector, to maintain the level of oil production over the medium-term; 4) inability to stabilize oil production due to increased militancy in the Niger Delta.
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