TEXT-S&P summary: Vaud (Canton of)
(The following statement was released by the rating agency)
Sept 25 -
Summary analysis -- Vaud (Canton of) ------------------------------ 25-Sep-2012
CREDIT RATING: AA+/Positive/-- Country: Switzerland
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
26-Jul-2010 AA+/-- AA+/--
25-Nov-2008 AA/-- AA/--
05-Oct-2007 AA-/-- AA-/--
The rating on the Swiss Canton of Vaud reflects Standard & Poor's Ratings Services' view of the "predictable and supportive" institutional framework for Swiss cantons, which we view as one of the strongest globally, and Vaud's "very positive" financial management, as our criteria define the terms. The rating also takes into account Vaud's wealthy and resilient economy--GDP per capita was CHF61,895 (EUR50,295) in 2011, very high in an international context--with strong health and education sectors, and its solid budgetary performance.
The rating is constrained by Vaud's large contingent liabilities, mainly related to its ownership of Banque Cantonale Vaudoise (BCV; AA/Negative/A-1+), and its large unfunded pension liabilities.
We view Vaud's financial management as "very positive" for the rating. We consider the canton to have a very high degree of transparency, detailed financial planning, prudent debt management, and a strong willingness to maintain a sound budgetary performance. In 2011, despite sluggish operating revenues up just 0.2%, Vaud was able to maintain a very solid operating margin at 11.7% of operating revenues, fully in line with our 2011 base-case scenario. Moreover, thanks to exceptional capital revenues from BCV and delays in its capital expenditure (capex) program, Vaud's surplus after capital accounts, at 8.8% of total revenues, exceeded the 7% forecast in our 2011 base-case scenario.
Under our base-case scenario for 2012-2014, we expect Vaud to maintain its solid budgetary performance, thanks notably to the resilience of its economy. We forecast a gradual weakening of the operating balance to 4% of operating revenues, owing to poor revenue growth of 1% to 1.5% per year, and still-fast-growing social and health expenditure of 5% per year. In our view, this operating performance will allow Vaud to post surpluses after capital accounts until 2013 and a low deficit after capital accounts in 2014, despite an increase in capex to CHF370 million per year, including net investments from the cantonal hospital, from 2012-2014, compared with CHF290 million from 2008-2011.
In our view, this performance will allow Vaud to reduce its tax-supported debt to a low 34% of operating revenues in 2014, compared with 37% in 2011. Nevertheless, our assessment of Vaud's debt burden remains negatively affected by its large share of unfunded liabilities, which accounted for 56% of operating revenues at the end of 2011.
We consider Vaud's large contingent liabilities, especially the cantonal bank BCV, to be the main rating constraint.
We view Vaud's liquidity position as "positive" under our criteria. We expect the canton's average adjusted cash and liquid assets over the next 12 months and its available drawings on its CHF200 million committed bank line with BCV to account for 80% to 120% of its next 12 months' debt service. We also consider that the canton has a strong access to external liquidity, and benefits from the strengths of its domestic capital market, to which we assign a Banking Industry Country Risk Assessment (BICRA) score of '1', with '1' being the lowest risk and '10' being the highest.
However, we expect some volatility in the canton's liquidity, ahead of its large debt capital repayment peak of CHF1.16 billion in 2013. Although the canton has already started ahead of schedule to refinance part of its debt coming due in 2013, its liquid assets and contracted lines will likely fall to a range between 80% and 120% of its next 12 months' debt service by mid-2013.
The positive outlook reflects our view that there is a one-in-three likelihood that the canton will show better budgetary performance compared with levels under our base case, through tighter control over operating spending and slightly stronger revenues, achieving an operating balance above 7% of operating revenues in 2014. In this upside-case scenario, Vaud would be able to structurally reduce its tax-supported debt below 30% of operating revenues and structurally maintain "very positive" liquidity with a debt service coverage ratio by adjusted cash and liquid assets in excess of 100% from 2013 onward. We could then raise the long-term rating on the canton in the next year.
We might revise the outlook to stable if, in line with our base-case scenario, Vaud's tax-supported debt remained structurally higher than 30% of operating revenues while its liquidity position remained volatile next year.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Methodology and Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009
-- Institutional Framework Assessments For International Local And Regional Governments, Dec. 19, 2011
-- Public Finance System Overview: Swiss Cantons, July 30, 2009
-- Banking Industry Country Risk Assessment: Switzerland, Apr. 11, 2012
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