Agusto & Co. Affirms NSIA’s ‘Aaa’ Rating, Predicts Stable Outlook

… Says NSIA’s Asset, Risk Management Framework Good, Supported By Quality Investments

Agusto & Co. a leading credit rating agency in Nigeria has affirmed the ‘Aaa (NGA)’ rating of the Nigeria Sovereign Investment Authority.

The rating reflects the NSIA’s strategic importance in providing stability for the country in stress periods, enhancing the development of Nigeria’s infrastructure and building a savings base for future generations.

Agusto also said the Authority’s strong capitalisation, good asset quality and well-diversified investment portfolio also got positive ratings.

However, in the Final 2023 Rating Report obtained by THE WHISTLER, Agusto noted that constraining the rating is NSIA’s exposure to the vagaries of the Nigerian political terrain and lingering global headwinds.

This is just as the Rating Agency also assigned a ‘3’ ESG score denoting that Environmental, Social and Governance (ESG) issues have material contributions to credit risk.

The NSIA’s core mandates include building a saving base for Nigeria’s future generations, enhancing the development of domestic infrastructure and providing fiscal stabilisation support in periods of economic stress.

The Authority is achieving these mandates by operating three ring-fenced funds namely the Stabilisation Fund, Future Generations Fund and the Nigeria Infrastructure Fund.

In the Rating Report, Agusto listed the support of the federal government, good capitalization, sizeable and well diversified investment portfolio and experienced management team as the key strengths of the NSIA.

In terms of asset quality of the NSIA, Agusto and Co. said overall, it considers NSIA’s asset quality to “be good, supported by quality investments and experienced external and internal fund managers.”

The NSIA’s infrastructure development strategy is anchored on direct investment in projects and companies via debt or equity, establishing a co-investment platform or enabling and creating institutions to address specific infrastructure problems.

In the year under review, the NSIA incorporated Equilease Systems Limited to invest in entities or equipment leasing arrangements related to healthcare infrastructure or healthcare service delivery and/or management.

Ultimately, the Authority had eight active direct subsidiaries, four indirect subsidiaries, five associates and two joint venture (JV) companies as at 31 December 2022.

While the current contribution of most of the investee companies to NSIA’s performance is currently minimal given their young profile, Agusto said it believes these companies have significant growth potential and are strategic to improving Nigeria’s low infrastructural stock.

The Report added, “We view positively the Authority’s emphasis on risk diversification which moderates vulnerability to headwinds and its adoption of a clear investment strategy that balances quality and yields while pursuing its core mandates.

“We believe NSIA’s asset quality would remain good despite prevailing global headwinds backed by the prudent and well-diversified asset composition.”

In the area of risk management, the Rating Agency said the framework operated by NSIA is good for its current business risks.

The Report added, “In our opinion, NSIA’s risk management framework is good for its current business risks. Nevertheless, we expect that the volatile global macroeconomic climate would continue to test the resilience of its risk management framework and investment strategy.”

In terms of earnings and performance, Agusto said it considered “NSIA’s profitability to be acceptable for a sovereign wealth fund given the global headwinds and widespread dip in the capital market.”

With more clarity around the impact of the Russia-Ukraine war, the slowing growth pace in global inflation and China’s ongoing recovery, the Rating Agency said the capital market performance in the first half of 2023 has been better relative to the corresponding period.

“The foregoing, in addition to exchange gains from the liberalisation of Nigeria’s FX regime and elevated interest rate climate, should support an improvement in profitability for NSIA in FY 2023,” it added.

In the area of capital adequacy and leverage, Agusto said in the Report that the NSIA is expected to maintain a strong capital base to retain the confidence of Nigerians and sustain future business developments.

The Report stated, “The Petroleum Industry Act signed in August 2021 introduced a price-based royalty of up to 10 per cent on crude oil sales that would be credited to NSIA as equity. We expect this to provide sustainable capital inflows to the Authority as more crude oil contracts are migrated to the PIA regime.”

On the liquidity and funding structure of the NSIA, Agusto and Co said it considers “NSIA’s liquidity profile and refinancing capacity to be good,” adding that “In the near to medium term, we expect more diversification in the funding sources given the planned debt raise and the contributions mandated by the PIA.”

In its outlook for the Authority, Agusto said in the Report that NSIA has sustained its cautious play in the global capital markets, introducing more short-dated fixed-income instruments.

It noted that the NSIA has also maintained a waned appetite for equities in emerging markets while accentuating diversification in its investment portfolios to hedge against volatility.

The Report continued, “We believe this move would uphold the NSIA’s good asset quality in the near term. With respect to performance, our outlook is more optimistic, given the rebound that has been witnessed in the capital markets, albeit still volatile.

“Our expectation that the Authority’s net FCY financial asset position would elicit material foreign exchange gains following the harmonisation of the domestic currency also supports our outlook on profitability.

“Finally, we believe direct allocation of price-based royalties mandated by the PIA should provide sustainable equity inflows and sustain the Authority’s good capitalisation. On this basis, we hereby attach a stable outlook to the rating of Nigeria Sovereign Investment Authority.”