(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 revenues.
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 treasury activities.
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