Fitch Affirms Canton of Zurich at 'AAA'; Outlook Stable

Fri Aug 30, 2013 11:34am EDT

FRANKFURT/LONDON/PARIS, August 30 (Fitch) Fitch Ratings has affirmed the Canton of Zurich's Long-term foreign and local currency ratings at 'AAA and Short-term rating at 'F1+'. The Outlooks on the Long-term ratings are Stable. KEY RATING DRIVERS The affirmation reflects Zurich's high degree of autonomy, its wealthy and dynamic economy and its good track record of sound financial performance and flexibility. It also reflects the envisaged slightly weaker budgetary performance and increasing debt burden. The Stable Outlook reflects Fitch's expectations that the canton's performance will remain in line with 'AAA' rated peers, although the medium-term forecast expects a slight deterioration of its financial figures. Fitch expects real GDP growth of 1.3% for 2013 and 2.0% in 2014 for Switzerland. Given its local economic profile and current progress, the canton's figures should mirror these with a slight uplift. However, increasing house prices put pressure on the real estate market and economic progress below expectations contains some risks for the local real estate market and banking sector. Zurich's operating margin turned back to positive in 2012. However, as the 2011 result was burdened by contributions to the canton's pension fund, it is not necessarily a good proxy for financial progress. The current financial ratios are still sound and Zurich achieved a surplus before debt variation, following high interest revenues from its PSEs and capital revenues accounting for about one-third of the canton's investment needs. The medium-term plan for 2013-2016 does not foresee progress for the canton's budgetary performance. Zurich's direct risk amounted to CHF4.3bn at end-2012 (2011: CHF3.35bn). The debt increase was due to the recapitalisation measures of the canton's pension fund and maturing debt in 2013 already issued at end-2012. However, the debt burden and debt coverage remains sound and debt servicing accounted for a low 1.5% of current revenue in 2012. The canton plans to consecutively increase debt until 2016 when debt will likely amount to CHF5.325bn, still below the past ten years peak of CHF7.4bn and not a meaningful risk. Zurich has material contingent liabilities and net overall risk amounted to CHF21.6bn at end-2012. Most relate to guaranteed obligations of its 100% owned Zuercher Kantonalbank (AAA/Stable/F1+) and the unfunded portion of the pension fund. The recapitalisation measures should protect the canton from a future higher burden and Fitch considers these prudently managed by the canton. At end-2012, Zurich had cash and cash equivalents of CHF2.6bn outstanding. Part of this stemmed from debt contracted in 2012 for the recapitalisation of the canton's pension fund, which is being paid out during 2013. However, Zurich always has cash of approximately CHF1bn in its accounts and has good access to short term liquidity in case of need, mitigating the canton's refinancing risk. RATING SENSITIVITIES Given the canton's large tax potential, a downgrade is unlikely under current conditions. However, should an increase of debt and corresponding debt servicing requirements largely limiting the canton's financial flexibility, or contingent risk materialise above Fitch's expectations, the rating would be reviewed. Significant changes in the canton's financial leeway or additional financial obligations, either in the inner- or intra-cantonal context could also be rating negative. KEY ASSUMPTIONS Our base case scenario relies on the following assumptions: - High degree of the cantonal financial autonomy will remain in place. - Zurich's economic progress will be in line or exceed the expected growth rates for Switzerland supporting the envisaged development of tax revenues. - Expected growth of Zurich's direct risk will not be accompanied by a decline of the budgetary performance and weakening of the debt coverage above Fitch's expectations. Contact: Primary Analyst Guido Bach Senior Director +49 69 76 80 76 111 Fitch Deutschland GmbH Taunusanlage 17 D-60321 Frankfurt am Main Secondary Analyst Christophe Parisot Managing Director +33 1 44 29 91 34 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 9 April 2013 on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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