(The following statement was released by the rating agency)
Dec 21 -
Summary analysis -- Saxony-Anhalt (State of) ---------------------- 21-Dec-2012
CREDIT RATING: AA+/Stable/A-1+ Country: Germany
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
16-Dec-2010 AA+/A-1+ AA+/A-1+
05-Jun-1998 AA-/A-1+ AA-/A-1+
The ratings on the German state of Saxony-Anhalt are supported by the very predictable and supportive institutional framework in Germany. Standard & Poor's considers the German intergovernmental system to be one of the strongest worldwide. The ratings also include one notch of extraordinary support from the indicative credit level (ICL), because Standard & Poor's deems it sufficiently predicable that Saxony-Anhalt would benefit from extraordinary credit support from the central government or another German state in a stress situation.
An ICL is not a rating. It is a means of assessing a local or regional government's (LRG's) intrinsic creditworthiness under the assumption that there is no sovereign rating cap. The ICL results from the combination of our assessment of an LRG's individual credit profile and the effects we see of the institutional framework in which it operates.
The ratings further benefit from our positive view of the state's management, which is a reflection of Saxony-Anhalt's firm and credible commitment to reducing its debt burden, which we deem achievable, given strong tax revenues and tight expenditure controls. After a weak year in 2010, Saxony-Anhalt's budgetary performance, with an operating balance of 1.1% and a balance after capital accounts of negative 8% of total adjusted revenues, is on an improving trajectory since 2011. Its operating balance was at almost 6% of adjusted operating revenues and only a slightly negative balance after capital accounts of 1.4% of total adjusted revenues in 2011.
In 2012, with an estimated operating balance of 7% and a balance after capital expenditures of about negative 0.1%, the state should confirm its positive trend on the back of increasing tax revenues and consolidation measures. According to our base-case scenario, we expect Saxony-Anhalt to achieve an operating surplus of 7.6% of operating revenues on average over 2013-2015, and a surplus after capital accounts. We expect the state to be able to post rising surpluses after capital accounts from 2012 on, which should help it reduce its high tax-supported debt burden, which we expect to decline to about 223% of operating revenues by 2015. Our base-case scenario is supported by our expectation of stable revenues and further consolidation efforts, which will allow for debt repayment. We also include our belief that the state will have to deal with nominal stable revenues over the next decade, owing to its continuing population decline and reducing transfers for regional development.
As a result of high spending and infrastructure investments in the past, the state has a very high tax-supported debt-burden by international standards, 227.4% of operating revenues in 2012. Furthermore, our assessment factors in the state's unfunded pension liabilities, at roughly 75%, which is high by international standards.
The ratings are further supported by Saxony-Anhalt's well-developed economy, which achieved wealth levels of more than US$32,000 per capita in 2012. Standard & Poor's expects growth rates for 2012 and 2013 to be 0.8% and 0.9%, respectively for Germany, and likewise for Saxony-Anhalt. Regional unemployment, albeit still high in a national comparison, has been declining steadily and had reduced to 11.5% as of year-end 2011 from 12.5% at year-end 2010.
The short-term rating is 'A-1+'. We view Saxony-Anhalt's liquidity position as neutral. Saxony-Anhalt's debt service is very high compared with other LRGs worldwide, at 30% of operating revenues in 2012 (excluding commercial paper (CP) refinancing), although debt levels are slightly set to decrease over the next few years. The state's average volume of cash and liquid assets and bank lines, excluding its use of CP, equates to about 61% of 2013 debt service.
In accordance with our criteria we take into account Saxony-Anhalt's average free cash, as well as two contractually agreed credit lines totaling EUR209 million, which we regard as committed and undrawn on average. In addition, in September 2012, the state had net liquid assets (net of haircuts implemented according to our criteria) of just below EUR1 billion. As Saxony-Anhalt has to repay up to EUR2.6 billion each year (with total debt service including interest payments in 2013 equating to about EUR3 billion), the state will continue to depend on its access to functioning capital markets to refinance its debt.
Saxony-Anhalt benefits from its strong access to external liquidity and the state regularly taps international capital markets. In addition, a well perceived CP program (rated 'A-1+'), backed by a ring-fenced EUR3 billion committed credit line, and voluntary liquidity exchange mechanisms between German states and the federal government support Saxony-Anhalt's liquidity position.
The stable outlook is based on our assumption that Saxony-Anhalt will continue its consolidation efforts and reflects our expectation that it will achieve balanced accounts after capital expenditures, in 2013 at the latest. Additionally we expect its debt burden to gradually improve under our base-case scenario.
The ratings could come under pressure if lower-than-expected tax revenues, combined with the state's unwillingness to adjust expenses accordingly, led to a budgetary deterioration and weakened its liquidity position.
Upside potential could result if the state managed to reduce its dependency on access to international capital markets.
We view both upside and downside developments as currently very unlikely.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Public Finance System Overview: German States, Jan. 12, 2011
-- 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