The ICL reflects our view of the very “predictable and supportive” institutional framework for Austrian states, Tyrol’s excellent budgetary performance with surpluses after capital accounts on average over five years, the state’s low tax-supported debt burden, its wealthy economy with the lowest unemployment rates in the European Union, and the very positive liquidity situation of the state. These strengths are partly mitigated by the moderate contingent liabilities stemming from the ownership of a financial institution. the ICL also takes into account Tyrol’s relatively high unfunded pension liabilities.
The consensus-based decision-making and the national stability pact binds all governments to aim for a zero deficit for the general government sector in Austria, we therefore do not expect that the upcoming tax sharing regime from 2014 onward will differ significantly from the current one. Tyrol also benefits from its excellent budgetary performance, with an operating surplus of 6.7% of operating revenues and balanced accounts after capital accounts on average over a five-year period. Compared with national and international peers, we expect the state to post low tax-supported debt at 14.3% of operating revenues under our base-case scenario for 2014.
The ICL is further supported by Tyrol’s high wealth levels, with GDP per capita close to EUR38,000, which translates into about 130% of the EU-27 average. Tyrol posts the lowest unemployment rate in Europe, highlighting this credit strength.
Partly offsetting these positives are Tyrol’s moderately high contingent liabilities, mainly stemming from its 100% ownership of a financial institution, Hypo Tirol Bank (not rated). Explicitly guaranteed liabilities of the bank account for more than EUR7.1 billion, or 261.4% of the state’s operating revenues in 2011. We estimate that the contingent liability from the ownership of Hypo Tirol Bank amounts to less than 15% of Tyrol’s operating revenues in an ‘A’-type stress scenario. In addition, we believe the moderately high net financial liabilities at 68.2% of operating revenues, stemming predominantly from unfunded pension liabilities, could limit the state’s future budgetary flexibility.
In our view, the ICL could deteriorate by one level to ‘aa+’ if the state loosens its hold on expenditures, leading to a significant decline in budgetary performance. In addition, another major capital injection into the state bank could burden the ICL. However, we regard this as currently unlikely.
We view Tyrol’s overall liquidity situation as “very positive,” with free cash, liquid assets, and committed facilities covering twice the state’s yearly debt service. Cash flows follow a similar pattern over the year, making them highly predictable. Cash at hand during the year is usually low. We see the state’s potentially unlimited access to liquidity from the Austrian Federal Financing Agency as a central credit strength, granting the state exceptional access to liquidity. Tyrol currently does not use its access to the agency, but is entitled to do so at any time.
The negative outlook on Tyrol mirrors that on Austria.
Tyrol’s indicative credit level is ‘aaa’, and we do not envisage a realistic downside scenario under which Tyrol’s ICL would weaken by two notches. We would therefore more likely downgrade the state following a sovereign downgrade than as a result of a change in the state’s ICL within our outlook horizon of two years. The revision of the outlook on Austria to stable would likely trigger a similar action on Tyrol.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- 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
-- Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign, Sept. 9, 2009
-- Credit FAQ: What Prompted Standard & Poor’s Recent Rating Actions On Austrian States?, Jan. 30, 2012
-- Rating Actions Taken On Six Austrian States Following Sovereign Rating Action, Jan. 25, 2012