(The following statement was released by the rating agency)
Dec 06 -
-- The Swiss City of Geneva benefits from a predictable and well-balanced institutional framework, positive financial management, and a wealthy and resilient economy.
-- We are affirming our ‘AA-’ rating on the city.
-- The stable outlook reflects our view that Geneva will limit its deficit after capital accounts and, in turn, its new debt accumulation.
On Dec. 6, 2012, Standard & Poor’s Ratings Services affirmed its ‘AA-’ long-term issuer credit rating on the Swiss City of Geneva. The outlook is stable.
The rating reflects our view of the city’s “predictable and well-balanced” institutional framework and “positive” financial management, as our criteria define the terms, and its wealthy and resilient economy. We believe these strengths are partially offset by the city’s heavy debt burden, the sensitivity of its revenues to economic cycles, and its limited tax leeway.
Under our methodology for rating international local and regional governments (LRGs), we view Geneva’s financial management as positive, reflecting very high transparency and prudent debt management.
Geneva is the second-largest Swiss municipality after Zurich, and the capital city of the Republic and Canton of Geneva (Geneva canton; AA-/Stable/--), accounting for 41% of the cantonal population at the end of 2011. Geneva has a wealthy economy, with a very high GDP per capita of Swiss franc (CHF)98,066 ($105,000) in 2011. This is positive for the city’s finances, as most of its operating revenues comprise locally collected taxes. Although these taxes are fairly sensitive to economic cycles, they are mostly levied on individuals, which limits volatility. There is, however, some degree of concentration on personal income tax, which includes revenues from private bankers and very wealthy individuals. We also believe that GDP growth, which has been resilient over recent years, may slacken, reflecting adverse international economic conditions.
Geneva posted a sound operating margin of 10.8% of operating revenues after provisions and before amortization in 2011, although this was below 2010’s 13.6% and a 20.5% peak in 2009. The thinner operating margin since 2010 mostly reflects the negative effects of some cantonal tax reforms and the adverse impact of the 2008-2009 downturn in tax revenues, and 4.3% growth in operating expenditure in 2011 compared with 2010. Net capital expenditure (capex) reached a high CHF129 million in 2011, up 24% from 2010, owing to urban renovation and housing expenses. As a consequence, despite its solid operating margin, the city recorded a limited 1.3% deficit after capital accounts in 2011, almost in line with our 2011 forecast of 0.5%. Despite its stabilization in 2011 following five consecutive years of reduction, we still view the city’s tax burden as high, with direct debt at 132% of operating revenues.
Under our base-case scenario, we forecast some deterioration in Geneva’s operating margin, with a progressive contraction to about 6% by 2014. We base this on our estimate that operating revenues will grow at an average annual 0.8% from 2012 to 2014, including 1.1% average annual growth in tax revenues, mostly owing to less favorable economic conditions. Meanwhile, we forecast that operating expenditure will grow at 2.7% per year on average. The narrowing operating margin and projected increase in net capital investment of CHF170 million from 2012-2014 will likely lead to deficits after capital accounts of about 8% of total revenues on average from 2012 to 2014. This includes a CHF120 million cash injection into the city’s public pension fund in 2013 to compensate for its use of a more conservative discount rate of 3.5%, compared with 4% until the end of 2011, reflecting expected lower capital market returns. Excluding this one-off item, Geneva’s deficit after capital accounts would be more limited at 5% per year on average from 2012 to 2014.
We expect Geneva’s direct debt to increase to 149% of operating revenues by the end of 2014, reflecting the 2013 cash injection into the public pension fund and growing debt-funded capex caused by reduced operating margins. The city’s net financial liabilities will likely represent over 190% of total revenues in 2014, compared with 180% at the end of 2011, including its unfunded public pension fund obligations, which is very high by international standards.
Although over 80% of Geneva’s operating revenues come from taxes, we consider the city to have restricted leeway to increase its revenues. We therefore believe Geneva’s budgetary flexibility mostly hinges on operating expenditure with limited headroom, given that we project capital spending will account for just 16% of total expenditure from 2012 to 2014, including the inflexible CHF120 million cash injection into the public pension fund in 2013.
We view Geneva’s liquidity position as “neutral,” according to our criteria. The city forecasts that on Dec. 31, 2012, it will have CHF100 million in available cash--including the proceeds of its November 2012 CHF200 million public bond issue--and CHF100 million available under its undrawn treasury line with the Banque Cantonale de Geneve (BCGE; A+/Stable/A-1). We believe Geneva will gradually use its available cash in 2013 to fund capex and repay debt. However, we expect the city’s cash and available liquidity facilities to cover more than 40% of debt service in the next 12 months. In our view, Geneva has strong access to external liquidity through various Swiss financial institutions and public counterparties. Our Banking Industry Country Risk Assessment puts Switzerland (Swiss Confederation; unsolicited AAA/Stable/A-1+) in group ‘1’, with group ‘1’ being the lowest risk and group ‘10’ the highest.
The stable outlook reflects our view that Geneva will limit its deficit after capital accounts and, in turn, its new debt accumulation by the end of 2014.
Under our upside scenario, we might consider a positive rating action on Geneva in the next two years if it structurally improved its budgetary performance and posted surpluses after capital accounts.
Under our downside scenario, if the city recorded structurally growing deficits after capital accounts, reflecting less rigorous financial management, we might consider a negative rating action in the same period.
We consider that both our upside and downside scenarios are unlikely at this stage.
We do not incorporate into our scenarios any negative financial impact from potential changes to the cantonal inter-municipal equalization and tax-redistribution scheme, or from any cantonal decision to abolish Geneva’s business tax, which was 13% of operating revenue in 2012. We currently do not have any clear information on the timing of these possible reforms. We believe that, if enacted, these reforms would be financially largely neutral for the city because additional revenues or transfers of responsibilities and charges would likely accompany them.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Institutional Framework Assessments For International Local And Regional Governments, December 19, 2011
-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local and Regional Governments and Related Entities And For Rating Their Commercial Paper Programs, Oct. 15 2009
Geneva (City of)
Issuer Credit Rating AA-/Stable/--
Senior Unsecured AA-