The recent default by Geregu Power Plc on its ₦40.09 billion Series 1 senior unsecured bond under its ₦100 billion bond programme represents a significant event for Nigeria’s corporate debt market.
The event places renewed focus on the role of credit risk analysis in Nigeria’s debt capital markets and the factors that underpin robust, forward-looking credit assessments. Intelligence Africa Ratings (IA) does not currently rate Geregu Power.
However, we assess other entities and instruments exposed to Nigeria’s power sector and incorporate the sector’s systemic risks into our credit assessments through our Industry Profile Adjustment.
The development provides an opportunity to consider several important aspects of credit analysis, including the distinction between systemic and issuer-specific risk, the importance of forward-looking assessment, and the role of credit enhancement in debt instruments.
Systemic versus issuer-specific risk
A default does not necessarily mean that an entire sector’s credit fundamentals have deteriorated. IA currently applies a +1.5 Industry Profile Adjustment to Nigerian power generation companies.
This incorporates +0.5 for regulatory oversight and government interventions supporting sector liquidity; +0.5 for high barriers to entry given the industry’s capital intensity; and +1.25 reflecting the low cyclicality associated with electricity’s essential nature.
These strengths are partly offset by a -0.75 adjustment capturing structural challenges including concentration around Nigerian Bulk Electricity Trading Plc as the primary offtaker for on-grid generation, gas-supply risks and persistent liquidity pressures arising from weak collections within the distribution segment.
Based on currently available information, IA does not consider the Geregu default, in isolation, sufficient evidence of a deterioration in the systemic credit characteristics captured by our Power Generation Industry Profile Adjustment. Accordingly, IA is maintaining the adjustment at +1.5.
Intelligence Africa’s credit analysis is forward-looking
Geregu’s default also reinforces the importance of looking beyond historical financial performance when assessing creditworthiness.
IA’s analytical process begins with an Initial Credit Score (ICS), a quantitative assessment derived from an issuer’s solvency and liquidity metrics relative to peers.
However, the ICS is explicitly not a credit rating.
IA therefore overlays the ICS with forward-looking and qualitative adjustments.
These allow analysts to capture developments that may not be reflected in reported financial ratios, as well as broader considerations relating to an issuer’s business profile. The resulting credit rating therefore combines quantitative analysis with a forward-looking and qualitative assessment.
Credit enhancement can materially change credit quality
IA’s framework recognises that a third-party guarantee can materially alter the credit risk borne by investors.
Where a guarantor has a stronger credit profile than the underlying obligor and provides a full, unconditional and irrevocable guarantee covering the timely payment of principal and interest on the debt instrument issued by that obligor, IA may apply a credit-substitution approach, linking the creditworthiness of the instrument to that of the guarantor.
For example, Transgrid Enerco Funding SPV Plc, which is also exposed to Nigeria’s power sector, is proposing up to ₦100 billion of Series 1 Senior Fixed Rate Bonds fully guaranteed by Infrastructure Credit Guarantee Company Limited (InfraCredit).
Intelligence Africa Ratings has assigned the bonds an expected rating of AAA.NG.EXP, at par with InfraCredit’s AAA.NG rating, reflecting the full credit substitution provided by the guarantee.
Muyiwa Jesuro & Adeyinka Olowofela
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