RPT-Fitch Affirms Hamilton City Council at 'AA-'; Outlook Stable
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Nov 1 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Hamilton City Council's (Hamilton) Long- and Short-Term Local Currency ratings at 'AA-' and 'F1+' respectively. The Outlook is Stable. At the same time, Fitch has affirmed the Local Currency Long-Term Senior Unsecured rating of Hamilton's outstanding notes at 'AA-'.
KEY RATING DRIVERS
The affirmation of Hamilton's ratings reflects: New Zealand's strong institutional framework; consistently improving budgetary performance; sound economic performance; and adequate debt and liquidity management.
Hamilton has continued focussing on its operating performance, improving its operating margin to 40.27% in FY13, up from 25.33% in FY12. This increase is due to operating revenue growth of 3.32% and a reduction of NZD13m in other expenses, namely operational efficiencies, and service reductions. Fitch forecasts Hamilton's operating margin will average 39.65% across the forecast to FY17, supported by stronger average growth in operating revenue than operating expenditure.
Hamilton's economy is adequately diversified with agriculture, and particular dairy farming, being the dominant industry. Agriculture has remained relatively resilient since the recession ended in March 2009, benefitting from strong asset prices and demand. Nonetheless, the unemployment rate peaked at 8.6% in FY12 reflecting the overall sluggish economic conditions. During FY13, there has been a significant reduction in unemployment, falling to 6.9% at FYE13 following a general improvement across the New Zealand economy.
Hamilton's funding and liquidity profile improved with short-term debt maturing within 12 months decreasing to 9% at FYE13, down from its peak of 43% in FYE11 (FYE12: 21%). This reduction in short-term maturity was brought on by Hamilton increasing total debt funding in FY13 through New Zealand Local Government Funding Agency Limited (LGFA, AA/Stable) to NZD210m, or 48% of Hamilton's outstanding debt. Hamilton has signalled their intention to increase this ratio to 80% over the medium term.
An unanticipated rise in capex, coupled with pressure to remain below the council's self-imposed net debt limit of NZD440m, could result in a capex backlog. However, Fitch views this risk as small given the council's extensive long term planning. Furthermore, Hamilton's increased enhancements to their capital programme, notably by significantly reducing yearly capex spend, tightening the management of costs and engaging external support to assist in asset management planning, would mitigate this risk.
Hamilton's ratings could come under pressure should the council's budgetary performance, and/or liquidity position, deteriorate significantly adding pressure on the council's debt position.
Positive rating action may occur if Hamilton's current balance continues to achieve results similar to yearly capex spend, while operating within their self-imposed debt ceiling.
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