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

    • What is Credit Rating? Hakeem O. Sanusi Executive Chairman Urban Development Bank of Nigeria Plc Presentation at the ALGON National Summit on Credit Rating in Abuja 18th March, 2009
    • Presentation Outline What is Credit Rating? Role s of Credit How do SNG s get rated? Benefit s of Credit Rating Current Financial Climate
    • What is Credit Rating? Role s of Credit How does SNG get rated? The Benefit of Credit Current Financial Climate
      • A credit rating is an independent opinion on the future ability, legal obligation and moral commitment of a n 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 creditworthiness What is Credit Rating? Definition
    • Key players in Domestic & International Credit Ratings What is Credit Rating? –cont’d Some Credit Rating Agencies
    • What is Credit Rating? –cont’d Source: 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 Grade Minimum threshold for Investment Grade Rating 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 D
    • Credit 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.
        • Provide s 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 SNG s may avoid certain decisions that would downgrade the ir future rating s .
      What is Credit Rating? –cont’d Significance of the Levels of Credit Rating
    • What is Credit Rating? Role s of Credit How do SNG s get rated? Benefit s of Credit Rating Current Financial Climate
    • 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 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
            • 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 analysis How do SNGs Get Rated? – cont’d Adoption of Credit Rating Process
    • What is Credit Rating? Role s of Credit How do SNG s get rated? Benefit s of Credit Rating Current Financial Climate
    • DFIs 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 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 loop Roles of Credit –cont’d Credit Cycle Borrowing Entity (SNG)
    • Sources are underutilised despite availability Roles of Credit –cont’d 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 $10 -14 bn range Roles of Credit –cont’d Source - Pension Fund Over allocation Equity Asset Class Lack of State and Corporate Bond Asset Class Source: Seminar on Alternative Asset Classes Feb, 2008 Asset Classes Max Portfolio Limits Actual Allocation Total (US$ 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
    • What is Credit Rating? Role s of Credit How do SNG s get rated? Benefit s of Credit Rating Current Financial Climate
      • 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 g overnance
      • 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 Factors Benefits of Credit Rating
    • What is Credit Rating? Role s of Credit How do SNG s get rated? Benefit s of Credit Rating Current Financial Climate
      • 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? 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 Term Capital 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 Term With 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 Roadmap
    • Conclusion Ratings – evaluation tool for Donor agencies, Intl. DFIs & Credit Enhancement Agencies
    • Contact Details
      • Urban Development Bank of Nigeria Plc
      • Plot 977 Central Business District,
      • P.M.B. 272, Garki,
      • Abuja, FCT.
      • Tel: 09-671 0863
      • www.udbng.com
      • [email_address]
      • [email_address]