OREANDA-NEWS. Fitch Ratings has downgraded Lagos State's Long-Term Foreign Currency Issuer Default Rating (IDR) to 'B+' from 'BB-' with a Stable Outlook. A full list of rating actions is at the end of this commentary.

Under EU credit rating agency (CRA) regulation, the publication of International Public Finance reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations.

Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. In this case the deviation was caused by the sovereign downgrade.

According to the published Sovereign and Local and Regional Governments Rating Review Calendar, the next review date for Lagos State is scheduled on 2 September 2016.

KEY RATING DRIVERS

The downgrade reflects the application of Fitch's 'International Local and Regional Governments Rating Criteria - Outside the United States'. Under our criteria, a local or regional government can be rated above the sovereign only in exceptional circumstances. Therefore, following the downgrade of Nigeria's Long-Term foreign currency IDR on 23 June 2016 (see 'Fitch Downgrades Nigeria to 'B+'; Outlook Stable' dated 23 June 2016 at ww. fitchratings. com) we have taken a similar rating action on the state as it is rated at the same level as the sovereign.

RATING SENSITIVITIES

Lagos's ratings are capped by the sovereign. A downgrade of the sovereign's ratings would lead to a corresponding action on Lagos's IDR. In the absence of a sovereign downgrade, an operating margin declining towards 30%, unfavourable changes in the national tax policy, debt rising beyond Fitch's expectations of NGN350bn-NGN400bn over the medium term and economic instability, even at the local level, could lead to a downgrade.

A sovereign upgrade could be reflected by Lagos's ratings, provided that improvements in budgetary performance result in debt levels at 1x the budget size (about NGN400bn). Further improvement of the local economy giving additional boost to internally generated revenues would also be positive for the ratings.

The rating actions are as follows:

- Long-Term foreign currency IDR: downgraded to 'B+' from 'BB-'; Outlook Stable

- Long-Term local currency IDR: affirmed at 'BB-'; Outlook Stable

- Short-Term foreign currency IDR: affirmed at 'B'

- National Long-Term rating: affirmed at 'AA+(nga) ; Outlook Stable

- Issue ratings on the MTN programme and senior unsecured bonds: affirmed at local currency 'BB-' and National Long-Term 'AA+(nga)'