August 30, 2017 / 10:31 AM / a year ago

Fitch Revises Queensland, QTC Outlook to Positive; IDRs Affirmed at 'AA'

(The following statement was released by the rating agency) HONG KONG/BARCELONA, August 30 (Fitch) Fitch Ratings has revised the Outlook on the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Australia's State of Queensland (Queensland) and Queensland Treasury Corporation (QTC) to Positive from Stable. We have affirmed their Long-Term Foreign- and Local-Currency IDRs at 'AA' and the Foreign- and Local-Currency Short-Term IDRs at 'F1+'. At the same time, Fitch has affirmed the rating on QTC's Commonwealth of Australia guaranteed outstanding debt at 'AAA'. A full list of rating actions is at the end of this rating action commentary. The affirmation reflects our expectations the state will continue to adopt strong fiscal discipline and report sound Fitch-adjusted operating balances, which have resulted in an improvement in the debt metrics. The ratings incorporate Australia's strong institutional framework, Queensland's improving direct debt position, sound liquidity and debt management policies, and the state's improved budgetary performance. QTC's ratings are credit linked to that of Queensland due to the state's statutory guarantee for all its liabilities. The revision in the Outlook to Positive reflects the sustained positive operating balances, improved debt-adjusted ratios and growing current balances. KEY RATING DRIVERS Queensland Australia's institutional framework supports Queensland's ratings. Grant income accounts for a large portion (around 46%) of Queensland's revenue and helps offset high operating expenditure in social services, such as education and health. Moreover, adjustments in the distribution of goods and services tax based upon the performance of a state or territory help mitigate any potential relative financial underperformance. In addition, the Australian sovereign (AAA/Stable) has mechanisms to limit the financial impact on a state from natural catastrophes and has supported the states in the past by providing guarantees for their debt issuances. Fitch expects Queensland's general government net debt ratios, including the surplus on the superannuation funds, to remain in line with higher rated peers. The state estimates that general government direct debt was AUD33.9 billion at the end of the financial year to June 2017 (FYE16: AUD35.5 billion) as Queensland utilised some of the surplus on the superannuation scheme to repay debt. Queensland's forecasts will see debt increasing to AUD38.7 billion by FYE20 on the back of large capital expenditure plans although our base case is for slightly lower debt growth. We estimate net debt/current revenue ratio remaining below 60% by FYE20 and debt-to-current balance rising from 5.9x to around 9x. However, these ratios are still sound considering our assessment of a strong institutional framework. Queensland estimates its real gross state product (GSP) increased by 2.75% in FY17, compared with an original forecast of 4% in the 2016/17 budget. The lower-than-estimated growth was partly attributed to Cyclone Debbie, which the state estimates to have detracted AUD2 billion from GSP due, inter alia, to the loss of 10 million tonnes of coal as a result of damaged infrastructure and around AUD300 million in sugar export losses. Queensland has taken a number of strong measures over the last couple of years to improve its budgetary performance, reduce future general government debt and rebuild its financial position. We calculate a Fitch-adjusted current balance of AUD4.2 billion in FY17 against AUD3.4 billion in FY16 and a projection of around AUD3.5 billion by FY20. We believe that the state's operating and current balances are sustainable through to FY20, although with marginal year to year variations. Operating margins are projected to decline from the average of 7% in the past three years to 4% in FY18 but rise again to 6% by the end of the forecast period. The low operating margins are a reflection of the heavy weight of social-related expenditure in Queensland's budget. Fitch expects the state to continue to run deficits before debt variation over FY18 to FY20 on the back of high net capital expenditure projections. Capital expenditure is projected to increase at an average rate of 7.3% per annum over the forward estimate period. The state's management of its debt and liquidity functions is sophisticated and conducted through QTC. QTC is the central financing authority and corporate treasury services provider for Queensland and its public-sector entities. QTC borrows domestically and internationally using a variety of debt instruments, and is the largest Australian semi-government issuer of Australian dollar-denominated bonds. The ratings also take into account Queensland's considerable contingent liabilities in QTC, as Queensland guarantees the obligations of all debt securities issued by QTC, and the obligations from QTC's derivative transactions. Fitch estimates that the funds QTC raised for public-sector entities and local councils added AUD62 billion to the state's net overall risk at FYE16. This is mitigated by the fact that a large proportion of QTC's debt is self-supporting as it is raised for state-owned entities, and the AUD9.15 billion in investments held in excess of the state's superannuation liability. 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, QTC has been classified as a credit-linked entity of the state, due to its strategic importance to Queensland's local government sector and the state's high level of control. QTC is the state government's central financing authority, and provides debt funding and management, and other services to the state's public entities and local governments. The affirmation of the ratings of QTC's debt guaranteed by the Commonwealth of Australia reflects the affirmation of Australia's Long-Term IDR at 'AAA' on 12 May 2017. QTC has AUD3.4 billion in debt outstanding that benefits from a guarantee from Australia. RATING SENSITIVITIES An upgrade could arise if Queensland continues to maintain strong fiscal discipline with positive current balances and moderate debt metrics in line with Fitch's expectations. Measures will include a projected net debt (adjusted for the surplus on the superannuation scheme) to current revenue ratio of around 60% by FYE20 and operating margins in the 5%-7% range. QTC's ratings will move in line with any rating action on Queensland. The ratings of the Australia-guaranteed 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 debt rating. The rating actions are as follows: State of Queensland Long-Term Foreign-Currency IDR affirmed at 'AA'; Outlook Positive Short-Term Foreign-Currency IDR affirmed at 'F1+' Long-Term Local-Currency IDR affirmed at 'AA'; Outlook Positive Short-Term Local-Currency IDR affirmed at 'F1+' Queensland Treasury Corporation Long-Term Foreign-Currency IDR affirmed at 'AA'; Outlook Positive Short-Term Foreign-Currency IDR affirmed at 'F1+' Long-Term Local-Currency IDR affirmed at 'AA'; Outlook Positive Short-Term Local-Currency IDR affirmed at 'F1+' Rating on senior unsecured debt guaranteed by Queensland affirmed at 'AA' Rating on debt guaranteed by the Commonwealth of Australia affirmed at 'AAA' Contact: Primary Analyst Samuel Kwok Associate Director + 852 2263 9961 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Secondary Analyst Fernando Mayorga Managing Director +34 93 323 8407 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Summary of Data Adjustments The financial data used in Fitch's calculations is taken from Queensland's budget papers. We have made the following adjustments to the reported numbers: - On-passed grants are excluded from revenue and expense figures and depreciation excluded from expenditure. Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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