(The following statement was released by the rating agency)
Dec 19 -
-- We are assigning our 'AA+' long-term issuer credit rating to the
Swedish Municipality of Ostersund.
-- The outlook is stable reflecting our view that Ostersund's budgetary
performance will remain sound through 2014 and that the municipality will
maintain its very strong liquidity position over the outlook horizon.
On Dec. 19, 2012, Standard & Poor's Ratings Services assigned its 'AA+'
long-term and 'A-1+' short-term issuer credit ratings to the Swedish
Municipality of Ostersund. The outlook is stable. At the same time, we
assigned our 'K-1' Nordic national scale rating.
The ratings on Ostersund reflect Sweden's predictable and supportive local and
regional government (LRG) framework, and the municipality's very strong
liquidity and strong local economy. The ratings also incorporate our view of
Ostersund's moderate budgetary flexibility. In addition, we believe that the
municipality's plan to expand its municipal in-house bank will require it to
build up capital markets expertise.
Ostersund's local economy is well balanced and has an increasingly diverse
industry structure. Its economy is little exposed to manufacturing (10% of
employment) and is based on trade, IT services, and tourism. In addition,
Ostersund hosts a branch of the Mid-Sweden University, which adds stability
and dynamism to Ostersund's economy. However, we view Ostersund's growth
prospects as somewhat constrained, evidenced by modest population growth. The
surrounding municipalities have a stagnant or even decreasing population,
which limits the region's overall growth prospects. However, Ostersund
maintains a position as a regional hub and, under our base-case scenario, we
expect it to post stable growth figures through 2014.
Ostersund benefits from very strong state support and institutional stability,
thanks to Sweden's far-reaching equalization system and its balanced budget.
The lack of a formal bail-out system is compensated by the Swedish
government's long record of support and commitment to stability.
We view Ostersund's management as neutral for the rating. Formal rules
stipulate processes and levels of financial disclosure. Budgets reflect goals
defined in a long-term plan and are based on realistic assumptions.
Specifically, Ostersund's management has a history of budgetary discipline,
leading to adequate cost control. However, we note that Ostersund is setting
up a municipal in-house bank to finance the majority of its corporate sector.
Given the municipality's lack of experience in capital markets, we consider
that expertise in this area will need to be built up over the coming months in
order to ensure risk-averse debt and liquidity policies.
Ostersund has a record of sound budgetary performance. At year-end 2011 its
operating margin stood at 5.5% of operating revenues. In addition, capital
expenditures of a modest Swedish krona (SEK) 265 million led to only a minor
deficit after investments of 1.3% of total revenues. For 2012, our base case
follows this trend and projects Ostersund's operating balance at a sound and
improved 6.7% of operating revenues. The improved operating balance projection
primarily reflects positive developments on the revenue side, strong budget
discipline, and cost control. However an increase in municipal investments to
SEK390 million brings the projected balance after capital expenditures to
negative 3.4% of total revenues.
In the 2013-2015 planning period, we expect that slowing growth in tax
revenues will moderate Ostersund's budgetary performance, with average
operating balances declining to about 4% of operating revenues in that period.
However, as our base case assumes only moderate municipal investment volumes,
we expect deficits after capital expenditures to be minor at about 2% of total
We consider Ostersund's debt position to be modest. The municipality currently
has very low levels of own debt, but owns a large group that has high debt
levels. Ostersund guarantees the majority of loans of its housing company,
Ostersundshem. The municipality plans to centralize the group's treasury
functions via a municipal in-house bank and intends to gradually assume the
financing of about SEK3 billion of its group debt. Consequently, we expect
Ostersund's tax-supported debt ratio to rise to about 40% of consolidated
revenues by 2014 from 9% at year-end 2011. However, as all of this debt in
onlent to subsidiaries that we consider to be self-supporting we take the
financial strength of the recipient entities positively into account in
assessing the municipality's overall debt position. Still, we note that
unfunded pension liabilities in the range of about 45% of operating revenues
constrains our assessment of Ostersund's debt position.
We note that Ostersund's tax revenues accounted for 63% of operating revenues
in 2011. Including modifiable fees and charges, we consider Ostersund's level
of modifiable revenues to be just short of 70%. Combined with relatively
inflexible expenditures, this results in an overall moderate degree of
budgetary flexibility in our view.
We consider Ostersund's liquidity to be "very positive." With the expansion of
its in-house bank, we expect Ostersund to set up capital market programs, and
to gradually finance most of its corporate sector. Consequently, Ostersund's
yearly debt service commitments will likely increase, but we expect available
liquidity and bank facilities to adequately cover those commitments.
Specifically, over the course of 2013 we expect Ostersund to set up a Swedish
krona (SEK)1 billion commercial paper program together with a SEK2 billion
medium-term note program, and to gradually expand its treasury activities. We
expect Ostersund's commercial paper program to represent the bulk of
short-term maturities over the coming 12 months. With regard to liquidity
back-up, we believe that Ostersund is well covered. We note that the
municipality has contracted committed bank facilities amounting to SEK2
billion. Together with a checking account of SEK300 million and cash and
short-term investments (pension fund), this bolsters its liquidity position at
about 2.5x the municipality's commercial paper program.
However, when Ostersund starts tapping the capital markets in 2013, we expect
it to gradually prolong the duration of its funding. As it maturity profile is
prolonged, we expect the municipality to decrease the amount of liquidity
facilities currently contracted. Still, under our base-case scenario, we
forecast that liquidity will remain "very positive" until 2014.
The stable outlook reflects our expectation that Ostersund will prudently
match its expenditures to its slowing growth in tax revenues, so that any
negative deviation will only have a marginal impact on its operating balances.
As we expect investment volumes to remain manageable, we do not foresee any
significant new borrowing to finance investment. We also expect management to
enforce prudent handling of refinancing risks associated with its expanded
Ostersund's further formalization and institutionalization of its risk
management practices, combined with a track-record of conservative capital
market activity in relation to the expanding in-house bank and a
lower-than-expected overall debt position including unfunded pension
liabilities, could lead to an upgrade.
Conversely, in line with our downside scenario, we might lower the ratings
should we see a severe deterioration in Ostersund's budgetary performance,
coupled with a high debt accumulation and a substantial decrease in its
liquidity buffers in relation to short-term maturities.
Related Criteria And Research
-- Methodology And Assumptions: Rating International Local And Regional
Governments, Jan. 5, 2009
New Rating; CreditWatch/Outlook Action
Municipality of Ostersund
Issuer Credit Rating AA+/Stable/A-1+
Nordic Rating Scale --/--/K-1