November 30, 2017 / 9:41 AM / a year ago

Fitch Revises Outlook on Invercargill City Council to Stable; Affirms at 'AA'

(The following statement was released by the rating agency) HONG KONG, November 30 (Fitch) Fitch Ratings has revised Invercargill City Council's (ICC) Outlook to Stable from Negative, and affirmed the Long- and Short-Term Local-Currency Issuer Default Ratings (IDR) at 'AA' and 'F1+' respectively. Fitch has also affirmed the long-term local currency senior secured rating on ICC's outstanding notes at 'AA'. The Outlook revision to Stable is driven by Fitch's reassessment of ICC's debt structure and the prospect of debt metrics remaining stronger than that of 'AA' category peers. Fitch has also reclassified part of ICC's debt as non-tax-supported debt, which resulted in an improvement in the debt coverage ratio in 2017. Fitch's affirmation of ICC's ratings reflects New Zealand's strong institutional framework, ICC's solid budgetary performance, and a low level of debt relative to peers. KEY RATING DRIVERS Strong Institutional Framework: Fitch views New Zealand's strong institutional framework as a key rating factor towards the rating assessment for the country's local regional governments. The framework is demonstrated in Invercargill's transparent reporting and financial disclosure, strong controls and supervision, a high level of own-source rate revenue, and limited expenditure responsibilities. Debt Increase Manageable: Fitch expects ICC's debt to see a gradual increase to fund ongoing infrastructure needs. We expect the payback period (direct debt/operating balance) to remain below 4.0x over the next two to three years. Fitch has deemed the NZD30 million ICC on-lent to subsidiary Invercargill Holdings Limited (ICHL) as non-tax-supported debt, considering ICHL's financial self-sufficiency. ICC's adjusted payback period was 2.9x at the financial year ended June 2017 (FYE17), compared with 4.4x including the NZD30 million. Short-Term Economic Challenge: Invercargill has a relatively small economy that has been affected by the volatility in aluminium prices over the past two years. The aluminium smelting industry is an important contributor to GDP and employment. Fitch believes the short-term volatility is within a normal economic cycle and should not alter ICC's overall credit profile, which is supported by stable budgetary performances. Stable Budgetary Performance: Fitch expects the city to maintain sound budgetary performance over the forecast period as rates revenue tends to be less susceptible to the economic cycle. In FY17, the city's operating margin improved slightly to 25%, supported by increases to the rates and rateable properties, and controlled spending; this was in line with a historic average of 24.9% over the past four years. Profile Comparable with 'AA' Peers: ICC has stable operating metrics on a relative basis, while its debt level is much lower than its peers'. ICC's debt payback ratio of 2.9 years was much stronger than 'AA-' rated domestic peers, such as Hamilton's 9.0 years, Rotorua's 8.3 years and Timaru's 5.0 years at FY16. However, ICC's smaller economy and short-term challenges may limit the council's debt ceiling threshold compared with peers at the same rating level. RATING SENSITIVITIES Fitch's reassessment of ICC's debt profile has resulted in a change in rating sensitivities. Updated Long-Term Plan: ICC's ratings would be under pressure if capital expenditure increases more than Fitch's expectations, resulting in direct debt to current balance rising above 6x, a level that is more consistent with 'AA-' peers. Improving Metrics: Positive rating actions could result from an improvement in the operating margin towards 30% and a direct debt to current balance ratio below 3x for a sustained period. Contact: Primary Analyst Samuel Kwok Associate Director +852 2263 9961 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Lorraine Liu Associate Director +852 2263 9929 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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