• Hakeem O. Sanusi, Executive Chairman, Urban Development ...

Urban DevelopmentBANK OF NIGERIA PLC- 1 -

What is Credit Rating?

Hakeem O. SanusiExecutive Chairman

Urban Development Bank of Nigeria Plc

Presentation at the ALGON National Summit onCredit Rating in Abuja

18th March, 2009


What is Credit Rating?What is Credit Rating?

Roles of CreditRoles of Credit

Presentation Outline

How do SNGs get rated?How do SNGs get rated?

Benefits of Credit RatingBenefits of Credit Rating

Current Financial Climate Current Financial Climate




How does SNG get rated?How does SNG get rated?

The Benefit of CreditThe Benefit of Credit



A credit rating is an independent opinion on the future ability, legal

obligation and moral commitment of an entity to meet its financial

obligations in a timely manner.

Globally, credit ratings are a pre-requisite to raising finance through bond issuance and are used to assist potential investors in decision making

Credit Rating: An evaluation of creditworthinessCredit Rating: An evaluation of creditworthiness

What is Credit Rating?

Definition


Key players in Domestic & International Credit RatingsKey players in Domestic & International Credit Ratings

What is Credit Rating? –cont’d

Some Credit Rating Agencies



Moody’s Standard & Poor’s/Fitch

Interpretation

Aaa AAA Highest quality

Aa1, Aa2, Aa3 AA+, AA, AA- High quality

A1, A2, A3 A+,A, A- Strong payment capacity

Baa1, Baa2, Baa3 BBB+, BBB, BBB- Adequate payment capacity

Ba1, Ba2, Ba3 BB+, BB, BB- Likely to fulfill obligations, ongoing certainty

B1, B2, B3 B+, B, B- High-risk obligations

Caa, Ca CCC+, CCC, CCC- Current vulnerability to default

D DSource: Interpretation from Richard Cantor/Fred Packer, Fed. Reserve Bank of New York

Sample Levels of Long term Credit Rating

Nigeria’s Sovereign Rating is BB-, a notch below Investment GradeNigeria’s Sovereign Rating is BB-, a notch below Investment Grade

Minimum threshold for Investment

Grade Rating


Credit Ratings – benefits for both Bond Issuer & InvestorsCredit Ratings – benefits for both Bond Issuer & Investors

Level of credit rating is directly related to borrowing costs. The nearer a Sub National Government (SNG)’s credit rating is to the Sovereign Ceiling, the nearer its borrowing costs is to the Federal Government’s.

Ratings provide information to the investment community and facilitates access by SNGs to debt markets.

They also affect the costs to both sides of buying and selling debt.

Provides free publicity about the SNGs’ financial performance and makes it easier to institute financial management techniques that will improve future ratings.

Influences policy directly as SNGs may avoid certain decisions that would downgrade their future ratings.


Significance of the Levels of Credit Rating


SNG requests a Rating

Rating team visits SNG, SNG makes presentation

Rating team analyzes data

Rating Committee discusses data & votes on rating

Notification of rating to SNG, SNG can accept or appeal rating

Formal notification of rating, rating is released to capital markets

Rating Agency monitors debt until debt matures

SNG presents new data to rating team

SNG appeals rating

Source: Credit Rating & Bond Issuing at the Subnational level, Training Manual, The World Bank

Responsibilities:

SNG

SNG

Agency

Agency

Agency/SNG

Agency

Agency

How do SNGs Get Rated?The Credit Rating Process


Development Partner can assist with institutional strengthening ahead of rating analysis.

As part of credit rating analysis, Development Partner will normally co-ordinate the preparation of SNG’s appraisal documentation, namely: Economic Structure – key economic drivers Demographic composition Financial performance & ratio analysis

(revenue, expenditure, debt levels & credit history, liquidity, efficiency)

Political & Legal structure Management & Administration Structures

(evaluation of intangible strengths & weaknesses and quality of management)UDBN can assist with institutional strengthening ahead of rating analysisUDBN can assist with institutional strengthening ahead of rating analysis

How do SNGs Get Rated? – cont’d

Adoption of Credit Rating Process


DFIs best-suited to assist States & Municipals access to funds/structured financeDFIs best-suited to assist States & Municipals access to funds/structured finance

The 3 tiers of Government & their responsibilities to provide infrastructure:

Roles of Credit

Fiscal Federalism


Borrowing enables the SNG to achieve the following:

Leverage on limited budgetary resources

Ability to fund large infrastructure projects which leads to increased internally generated revenue (IGR), business & investment

Socio-economic development

Credit – fast tracking Development and InvestmentCredit – fast tracking Development and Investment

Roles of Credit –cont’d

Why Borrow?


Credit history required (previous record of debt repayment)

Development Partner can assist in establishing a credit history (willingness to lend prudently to all tiers of Government)

Prior loans may be able to be refinanced more cheaply after credit rating is achieved

UDBN can get you into the loopUDBN can get you into the loop


Credit Cycle

Borrowing Entity (SNG)


Sources are underutilised despite availabilitySources are underutilised despite availability


Available Funding Sources

Contractual Savings Sector

Pension Funds

Insurance Companies

Mutual Funds

Banking System

Commercial Banks

Discount Houses

Foreign Investors

Hedge Funds


Long term capital potential estimates of the market in the $10 -14 bn rangeLong term capital potential estimates of the market in the $10 -14 bn range


Source - Pension Fund

Asset Classes Max Portfolio Limits

Actual Allocation

Total(US$ Bn)

Ordinary Shares 25% 39% 2.0

Government Securities: 1.2

Federal Government 100% 23.5%

State Government 20% 0.5%

Corporate Debt Securities 30% 0% 0.0

Open/ Closed End Funds 5% 1% 0.1

Money Market Instrument 35% 27% 1.4

Other N/A 10% 0.5

Total Value 6.8

Over allocation

Equity Asset Class

Lack of State and Corporate

Bond Asset Class

Source: Seminar on Alternative Asset Classes Feb, 2008


An independent credit rating implies lower risk, therefore investors demand lower returns.

Good Credit Rating lowers borrowing costs through access to wider sources of funds.

Bridges information gap between SNGs & potential investors Promotes fiscal discipline and entrenchment of good

governance Benchmarks SNGs to each other (comparative analysis) Improved performance is rewarded by higher credit ratings and

lower borrowing costs Infrastructure attracts business & investment, creating

employment

Demand, Delivery, Development & Discipline = Key Re-election FactorsDemand, Delivery, Development & Discipline = Key Re-election Factors

Benefits of Credit Rating


Global credit crunch and attendant losses have led to shrinking of investible funds

Increased aversion to risk by investors hence stricter risk assessment of eligible projects

Domestic Equity market is currently volatile hence investor preference for fixed income securities such as Bonds

Current Financial Climate

Implication of the Credit Crunch - Flight to Quality or Security?Implication of the Credit Crunch - Flight to Quality or Security?

Issues

The above issues tend to highlight the importance of independent credit ratings reveals quality assets and support investment decisions

However in Nigeria, there is prospect for long term economic growth riding on the back of continuous investment required for infrastructure and other development needs

Consequence


Immediate TermCapital Market Funds – based on corporate credit rating, UDBN

will mobilise funds from the domestic capital market through the issuance of bonds and on-lend the proceeds to qualifying SNGs based on shadow credit rating of the SNGs by UDBN

Medium TermWith a credit history facilitated by UDBN’s catalytic development

loan, the Bank can guide SNGs through the process of submitting the required data to the Agencies as a precursor to successful inception credit rating. Subsequently, qualifying SNGs can approach capital market directly to raise finance via bond issue

UDBN as Development Partner

Strategic Partnership RoadmapStrategic Partnership Roadmap


Conclusion

Ratings – evaluation tool for Donor agencies, Intl. DFIs & Credit Enhancement AgenciesRatings – evaluation tool for Donor agencies, Intl. DFIs & Credit Enhancement Agencies


Contact Details

Urban Development Bank of Nigeria PlcPlot 977 Central Business District,

P.M.B. 272, Garki,Abuja, FCT.

Tel: 09-671 0863

www.udbng.com

[email protected]@udbng.com

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