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Fitch Affirms Wandsworth Council at 'AA+'; Stable Outlook
June 13, 2014 / 3:36 PM / 3 years ago

Fitch Affirms Wandsworth Council at 'AA+'; Stable Outlook

(The following statement was released by the rating agency) BARCELONA/PARIS/LONDON, June 13 (Fitch) Fitch Ratings has affirmed the London Borough of Wandsworth's (Wandsworth) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA+' and its Short-term foreign currency IDR at 'F1+'. The Outlooks on the Long-term IDRs are Stable. The ratings reflect the strong institutional framework of the UK, and Wandsworth's strong track record of focused financial management, which includes conservative budgeting, prudent investment policies and its low level of debt. However, Wandsworth also has a low operating margin and limited flexibility to raise revenue. The Stable Outlook reflects Fitch's view that its performance will be stable, with debt slightly declining over time. KEY RATING DRIVERS Fitch considers Wandsworth as one of the financially stronger local authorities in the UK and as a result is slightly less dependent on government transfers. Local authorities are highly dependent on central government transfers, have no tax-setting powers except for increasing council tax and, since April 2013, are entitled to a share of increase in non-domestic or business rates. The distribution of revenue support grant and the share of business rates top-up is based on a specific formula, which takes into account economic and financial strengths of the local authorities. Wandsworth reported a strong surplus before net financing of 11% in the fiscal year to March 2013. This followed an overall deficit for FY12, which was affected by a buy-out of the one-off housing revenue account (HRA) subsidy. Operating margin was low in FY13 at 2.6% but the operating balance covered interest payments by 5x. Wandsworth's budget for FY14 showed a reduction in operating expenditure and the operating margin is expected to have increased significantly. The council has a successful track record in reducing costs. Since 2010, GBP71m has been reduced from the general fund budget. A large part of savings over FY14-16 will come from reserves as well as planned budget reductions and on-going reviews. At FYE14, Wandsworth's total debt was GBP195m, down by EUR18m from FYE13. The council began reducing debt in FY13 after it made use of a new loan contracted with the Public Works Loan Board (PWLB), partly funding the HRA subsidy buy-out. Debt is not expected to increase over the next four years. Moreover, Wandsworth's investment portfolio increased considerably to a strong GBP396m at FYE14 and can be used at any time to cover potential shortfalls. Wandsworth's sound cash position covered all direct debt outstanding at FYE13. As per the last actuarial validation, Wandsworth's pension fund obligations were 95%-funded. Wandsworth has above-average wealth levels compared with London and national averages. This should continue as population continues to grow and given an above-average share of high educational qualifications. The local economy is driven by a strong services sector with a significant number of people working in public administration or commuting daily to central London, which helps to sustain wealth levels. RATING SENSITIVITIES A downgrade could be triggered by a persisting negative trend in operating performance, increase of debt beyond Fitch's expectations and a failure to consistently and sufficiently cover debt service by the operating balance. Given the limited revenue flexibility of local authorities in the UK, the rating is sensitive to any negative change in the central government grants scheme, particularly in the context of the tight operating margin of Wandsworth. Continued prudent management and budgetary performance in line with the average over the last five years will trigger an upgrade, providing there is also an upgrade of the sovereign. KEY ASSUMPTIONS Fitch assumes that the council's sound liquidity and high reserves will remain an adequate buffer for unexpected revenue shortfalls to ensure debt service requirements and for future housing sector developments. Contact: Primary Analyst Ines Callahan Associate Director +34 93 467 87 45 Fitch Ratings Espana S.A.U. Paseo de Gracia 85, 7 Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 323 84 10 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 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, and 'International Local and Regional Governments Rating Criteria outside United States', dated 23 April 2014, are available on www.fitchratings.com. 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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