Analysts Positive on LASG N87.5bn Bond Offer

Analysts at Meristem Securities Limited (MSL) have rated the N87.5 billion bond issuance by the Lagos State Government as a good investment opportunity.  After raising N80 billion last year under its N167.5 billion programme, the Lagos State government is set to raise N87.5 billion, which is the second tranche. The first tranche was issued with a coupon of 14.5 per cent last December.
Assessing the bond issue, analysts at MSL recommended the bond as a good buy. According to them, their recommendation is based on the current yield environment of the comparable FGN Bonds of similar maturity.
The analysts explained that the current LSG bond is rated by   Fitch as BB, Global Credit Rating as A and by Agusto & Co as A+.
“The bond is secured and guaranteed by sinking fund from a combination of Irrevocable Standing Payment Order (ISPO)) and 15 per cent statutory deductions from the internally generated revenue (IGR). We consider the positive economic fundamentals of Lagos State as an issuer and the viability of the state in terms of revenue generation as likely positives for allay of credit risk,” they said.
Although he noted that liquidity risk remained a downside to the issuance, they declared: “We are comfortable with the sources of revenue for repayment plan given that 70 per cent of revenue comes from IGR. In our view, this presents viability and less dependence on FAAC allocation,” they said.
The analysts noted that their outlook on interest rate was stable given the current policy stance of the CBN in terms of price and exchange rate stability, while yields on FGN bonds might assume a downward trend in the medium to long term given the expected liquidity into the financial system between now and 2015.
“We recommend a 1.5 per cent premium (max) to the current yield on 7 year FGN bond instrument as the appropriate yield at which investors can bid for the current LASG 14.1 per cent 23, Nov 2019 bond instrument. This, in our view, should be sufficient to compensate for the credit and liquidity risks plus the downward outlook on yields,” they said.

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