Fitch Affirms Queensland and QTC at 'AA'; Outlook Stable

Wed Sep 3, 2014 5:24am EDT

(The following statement was released by the rating agency) HONG KONG/BARCELONA, September 03 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) on Australia's State of Queensland (Queensland) and Queensland Treasury Corporation (QTC) at 'AA'. The Outlooks are Stable. At the same time, Fitch has affirmed QTC's Commonwealth of Australia guaranteed outstanding senior unsecured debt rating at 'AAA'. A full list of ratings is at the end of this commentary. KEY RATING DRIVERS - Queensland Fitch views Australia's institutional framework as supporting Queensland's ratings. Large grants, accounting for about 50% of Queensland's operating revenue, help to offset the state's high operating expenditure in service areas such as education and health. In addition, the Australian sovereign (AAA/Stable) has support mechanisms should any one state suffer natural catastrophes. The affirmation reflects Fitch's view that Queensland has taken strong measures over the last couple of years to rebuild its financial position. Queensland is particularly looking to limit expenditure growth through stringent operating efficiencies, while supporting revenue growth by limiting taxation measures and increasing its share of the national GST pool from 19.9% to 21.4%. The ratings also take into account Queensland's considerable contingent liabilities in QTC, whose risk is partly mitigated by its lengthened debt maturity profile and significant liquid assets. The Stable Outlook reflects Fitch's expectations that Queensland's annual revenue growth will contribute to a restoration of the state's fiscal position. The Outlook factors in reducing deficits in the next two financial years and the prospect of Queensland posting a surplus in the financial year ending 30 June 2016 (FY16). Operating revenue growth remained subdued during FY13, although the state forecasts revenue to rise 7% in FY14. Queensland expects operating revenue growth to average 6% over FY14-FY18 as a result of increases in the state's share of the national GST pool and improving state-based taxes. Nevertheless if the growth is weaker than forecast, Queensland may have to intensify measures to cut expenditure. Queensland's budget for FY15 forecasts a fiscal deficit of AUD2.3bn However this is primarily due to rebuilding following the destruction caused by tropical cyclone Ita in April 2014 and the timing of funding from the Commonwealth. Fitch estimates capital expenditure will continue at high levels compared with its peers, averaging AUD7.1bn annually over FY15-FY18. However, the state has committed to reducing capital expenditure from the peak of AUD11bn in FY10 in line with the state's debt stabilising at AUD48bn by FY15. The state government, subject to obtaining a mandate, is proposing a potential program of asset transactions to dispose of several government assets. The impact of this would be an estimated AUD25bn reduction of total state debt to AUD55bn from AUD80bn. However these asset transactions are not factored into Queensland's forward estimates. RATING SENSITIVITIES - Queensland Negative rating action could occur should Queensland be unable to restore the operating margin, or should debt grow significantly above AUD48bn. An upgrade is unlikely in the near term, but continued fiscal recovery through strong financial management would be viewed positively. KEY RATING DRIVERS AND SENSITIVITIES - QTC and Debt Ratings QTC's ratings are credit-linked to those of Queensland through the state's statutory guarantee and QTC's 100% state ownership. Under Fitch's criteria "Ratings of Public Sector Entities - Outside the United States", QTC has been classified as a dependent public sector entity of the state due to its strategic importance to Queensland's local government sector, and its strong control by the state. QTC is the state government's central financing authority that provides debt funding and management and other services to the state's public entities and local governments. QTC's ratings will therefore move in line with any rating action on Queensland. The affirmation of QTC's guaranteed senior unsecured debt rating reflects the affirmation of the Commonwealth of Australia's Long-Term Issuer Default Rating (IDR) at 'AAA' on 28 March 2013. QTC has four outstanding bond lines benefiting from a guarantee by the Commonwealth of Australia The ratings of the Australia-backed securities are linked to the ratings of the sovereign. A downgrade of the sovereign's IDR would result in a downgrade of QTC's guaranteed senior unsecured debt rating. The rating actions are as follows: State of Queensland Long-Term IDR affirmed at 'AA'; Outlook Stable Short-Term IDR affirmed at 'F1+' Long-Term Local-Currency IDR affirmed at 'AA'; Outlook Stable Short-Term Local-Currency IDR affirmed at 'F1+' Queensland Treasury Corporation Long-Term IDR affirmed at 'AA'; Outlook Stable Short-Term IDR affirmed at 'F1+' Long-Term Local-Currency IDR affirmed at 'AA'; Outlook Stable Short-Term Local-Currency IDR affirmed at 'F1+' Senior unsecured debt rating guaranteed by Queensland affirmed at 'AA'; and Senior unsecured debt rating guaranteed by the Commonwealth of Australia affirmed at 'AAA': Contact: Primary Analysts (Queensland) Terry Gao Director +852 2263 9972 2801, Tower Two, Lippo Centre, 89 Queensway, Hong Kong Ines Callahan (QTC) Associate Director +34 93 467 8745 Fitch Ratings Espana. S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analysts Ines Callahan (Queensland) Associate Director +34 93 467 8745 Terry Gao (QTC) Director +852 2263 9972 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@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 Ratings Criteria - Outside the United States', dated 23 April 2014, are available at www.fitchratings.com Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria (Outside the United States) – Effective Apr. 19, 2011 to Mar. 5, 2012 here Additional Disclosure Solicitation Status here ALL 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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