Global credit rating agency, Fitch Ratings, has said Lagos State maintained positive economic ratings despite missed contracted services payment by Visionscape Sanitation Solutions as a result of halting of waste management agreement.
In a statement dated March 28, 2019, Fitch said the state’s B+/(AA+(ngn)/ ratings remained stable and unaffected by the default of SPV Municipality Waste Management Contractors Limited (MWMCL) led by Visionscape occasioned by the halt of the said contract and the subsequent resolution of the State House of Assembly.
SPV is a private consortium led by Visionscape Sanitation Solutions (Visionscape), a company mandated to manage Lagos’ waste collection and disposal.
Early in March, SPV was reported to have missed the semi-annual principal and coupon payments of about N800 million on N4.85 billion tranche under MWMCL’s N50 billion medium term note programme.
The bond was issued by MWMCL reportedly to raise funds to purchase recycling trucks and equipment, linking debt service to the proceeds coming from Lagos for implementation of the waste recycling contract.
Some market participants had deemed MWMCL’s default to imply also the default of Lagos, given the state’s irrevocable standing payment order (ISPO) whereby a stream of its own internally generated revenue was remitted to the SPV account for debt servicing.
But the agency, in its opinion, said the ISPO, and similar arrangements in other countries, is a mechanism enhancing the predictability of payment flows from an administration, potentially enabling it to address liquidity stress by prioritising payment of certain liabilities.
However, such a mechanism normally falls short of the senior, unconditional, and irrevocable features qualifying it as a solvency guarantee, i.e. a guarantee of timely repayment of long-term financial liabilities, such as bonds and loans, over extended periods.
“In short, the ISPO is seen as a commitment to set aside resources for debt service, making it a risk-mitigating factor in case of liquidity stress by an administration rather than a credit enhancement.
“Fitch does not rate the defaulted bond and believes that it would not have been able to rate the state’s commitment towards Visionscape – underpinning the bond debt servicing – under its Public-Sector Counterparty Obligations in PPP Transactions Criteria. Fitch does not rate commercial liabilities, i. e. those arising from service provision, such as waste fees/utility bills,” the agency said.
It also said: “Lagos reportedly committed itself to pay for a service but those payments were discontinued in 2018 once the waste collection halted and the State’s House of Assembly issued a subsequent resolution.
“Under Fitch’s criteria, Lagos’ ratings are not impacted because the defaulted debt is not Lagos’ direct debt, as well as because its multi-annual commitment towards Visionscape is unlikely to qualify as a PPP counterparty obligation. This would make the credit quality of the bond and its issuer detached from that of Lagos.”
