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

The National Rating(s) could be subject to changes following potential recalibration of the National Rating scale

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 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 our downgrade of the sovereign's LTLC IDR on 22 July 2016.

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 of Lagos State's LTLC IDR to 'B+' reflects the following key rating driver and its relative weight:

HIGH

Lagos's ratings are capped by the sovereign. 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 LTLC IDR on 22 July 2016 (see 'Fitch Applies Criteria Changes to Global Sovereign Ratings' at ww. fitchratings. com) we have taken a similar rating action on the state to align its local currency ratings with the sovereign's.

RATING SENSITIVITIES

A downgrade of the sovereign's ratings would lead to a corresponding action on Lagos's IDRs. 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 may be reflected in Lagos's ratings, provided that improvements in budgetary performance reduce debt levels to 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 ratings are as follows:

- Long-Term Foreign Currency IDR: 'B+'; Outlook Stable

- Long-Term Local Currency IDR: downgraded to 'B+' from 'BB-'; Outlook Stable

- Short-Term Foreign Currency IDR: 'B'

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

- Local currency MTN programme and senior unsecured bonds: downgraded to 'B+' from 'BB-'

- Local currency MTN programme and senior unsecured bonds: 'AA+(nga)'