August 22, 2014 / 4:15 PM / 3 years ago

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

(The following statement was released by the rating agency) FRANKFURT/LONDON/PARIS, August 22 (Fitch) Fitch Ratings has affirmed the Canton of Zurich's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' and its Short-term foreign currency IDR at 'F1+'. The Outlooks on the Long-term IDRs are Stable. KEY RATING DRIVERS The ratings reflect Zurich's strong autonomy, its wealthy and dynamic economy, which translates into a strong tax base and sound debt coverage ratios, its prudent budgetary management and financial flexibility. The ratings also consider a slightly weaker-than-envisaged budgetary performance so far in 2014 and an increasing debt burden. The Stable Outlook reflects Fitch's expectations that Zurich will maintain a strong financial profile, notwithstanding a subdued budgetary performance. It also reflects Fitch's view that its debt coverage ratios will remain in line with its rating level. Zurich has above-average wealth levels even in the Swiss context. However, some uncertainties stem from the financial sector due to low interest rates and client activity as well as increased litigation and regulatory costs. A slowdown of Zurich's economy would negatively affect the real estate and banking sectors, two large contributors to the canton's GDP and revenue. Zurich's operating performance in 2013 remained low at previous year levels. High financial revenues and fairly low and declining interest expense, however, resulted in a current margin of 3.1%, covering a large part of the canton's investments. Nevertheless, increasing investments and lower capital revenues led to a small deficit before debt variation of 1.1%. That stated, financial revenues so far in 2014 are still sound. The medium-term plan for 2014-2017 foresees small improvements starting from 2015. Zurich's direct risk amounted to CHF5.1bn at end-2013, up from CHF4.3bn in 2012. The increase was driven by refinancing needs of CHF1bn debt due in 2014. Zurich aims to keep direct risk stable in 2014 before considering increasing debt again to CHF5.7bn in 2017. The canton's debt burden and debt coverage remain sound; debt servicing accounted for a moderate 6.1% of current revenue in 2013. Following a new CHF700m bond issued in 2014, the canton is exposed to floating-rate risk. However, Fitch views the impact of rate risk on the canton's interest burden as negligible. Zurich has material contingent liabilities; net overall risk amounted to CHF21.6bn at end-2013. Most related to guaranteed obligations of its 100%-owned Zuercher Kantonalbank (ZKB; AAA/Stable/F1+) and the unfunded portion of its pension fund (the cover ratio stood at a strong 98.8% at end-June 2014). Recapitalisation measures introduced in 2011, which Fitch views as prudent management, should protect the canton from a future higher burden. Fitch does not include in its assessment the debt of Zurich's public sector entities since we assume their debt is entirely self-supporting. At end-2013, Zurich had cash and cash equivalents of CHF1.6bn outstanding. Part of this is debt contracted in 2013 to replace maturing debt in 2014. However, Zurich always has available cash of approximately CHF1bn and can resort to its two committed credit lines. This access to short-term liquidity mitigates refinancing risk. RATING SENSITIVITIES Given the canton's large tax potential, a downgrade is unlikely. However, factors that could lead to a downgrade are a continuous increase of debt, a corresponding weakening of debt servicing ability - with a debt payback of over 20 years - operating margin close to zero, limiting the canton's financial flexibility, or contingent risk above Fitch's expectations. Significant changes to cantons' financial leeway or additional financial obligations, whether inner- or intra-canton, could also be rating-negative. A negative rating action on Switzerland would result in a review of the ratings of Zurich. KEY ASSUMPTIONS Our base case scenario relies on the following assumptions: - Continuing strong cantonal financial autonomy - Zurich's economic progress will at least be in line with Switzerland's expected growth rates - Expected growth of Zurich's direct risk will not be accompanied by a decline of budgetary performance and weakening of the debt coverage beyond 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 Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 23 April 2014 on Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States 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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