International credit rating agency Standard & Poor's (S&P) has placed its AA rating on Auckland Council on CreditWatch with negative implications citing concerns over the council's debt levels reaching 200% of operating revenue by 2015.
“The rating action follows our discussions with Auckland Council which highlighted their plans to significantly increase capital expenditure, particularly in the area of transport,” said S&P credit analyst Anna Hughes.
“At this stage, it is unclear as to how much of this capital expenditure will be funded using debt; however, current revenue and capital-expenditure projections suggest that the council’s debt levels will exceed 170% of operating revenues by fiscal 2013 and reach 200% by fiscal 2015,” Hughes added.
“We expect to resolve the CreditWatch during the next 90 days as the council finalizes its draft 2012 Long Term Plan. Any rating action would not likely exceed one notch.”
Council debt pushing NZ$3 billion
According to its annual report, Auckland Council, alone, had total net borrowings of NZ$2.97 billion as of June 30.
However, when subsidiary Watercare Services and various council controlled organisations such as Auckland Transport, which manages the Auckland region’s transport services and infrastructure, Auckland Council Property, which manages the council's commercial property, Auckland Council Investments, which manages the council's investments including shareholdings in Auckland International Airport and Ports of Auckland, and Auckland Tourism, Events and Economic Development, are added in, total debt rises to NZ$4 billion.
S&P has also put Watercare's AA- rating on CreditWatch with negative implications.
As of June 30 Auckland Council had net assets of NZ$26.5 billion alone and NZ$27.9 billion when Watercare and the council controlled organisations are added. For the eight months to June 30 Auckland Council had total income of NZ$1.32 billion and total expenditure of NZ$1.31 billion. When Watercare and the council controlled organisations are added, total income was NZ$1.87 billion and total expenditure NZ$1.99 billion.
Eyeing overseas borrowing
S&P review of the Auckland Council's credit rating comes as it prepares to borrow money overseas in currencies other than the New Zealand dollar, following the passing of recent legislation by Parliament that will allow it to do so. The Council says any offshore borrowing would be on a fully hedged basis back to the New Zealand dollar to counter exchange rate risk. Auckland Council currently borrows from local retail and institutional investors and banks.
Auckland Council chief financial officer Andrew McKenzie told Radio New Zealand a credit rating downgrade would add between 0.5% and 1.5% to the council's annual interest bill on its debt, or between NZ$3 million and NZ$12 million.
An AA rating is S&P's third highest. A one notch downgrade would take Auckland Council to AA-, which is the same rating the old Auckland City Council had before the amalgamation of eight councils in the Auckland region into the 'Super City' on November 1 last year.
In a statement McKenzie said being placed on CreditWatch didn't reflect any change in the security of Auckland Council or its ability to pay interest and refinance existing loans.
“Council’s existing loans are secured by its ability to rate and that has not changed,” McKenzie said.
"Standard & Poor's has analysed Auckland Council’s baseline projections, which include the full consolidation of previous council financial results and budgets, the introduction of new funding arrangements, such as funding the capital cost of public transport initiatives like electric trains, and the impact of consolidating our financial policies."
'AA- rating would still be top echelon'
The credit rating agency will review its position when it gets more detail on Auckland Council's ten-year Long-Term Plan.
"Council is undergoing its own review of its funding arrangements and will undertake full public consultation on its Long-Term Plan and its wide range of projects and their funding. Other highly rated organisations have been through a similar process recently – the US government, New Zealand government, Transpower and other major New Zealand councils have all had their credit ratings lowered in the past three months," McKenzie added.
“Even if our credit rating is downgraded to "AA-" Auckland Council will remain in the top echelon of rated New Zealand borrowers. Only the Crown, government-related entities, the banks and a small number of other councils will be rated higher than Auckland Council.”
(Updates add comment from Andrew McKenzie on Radio NZ, figures on the council's total debt and financial position, plus comments from Auckland Council's statement on S&P's move).
28 Comments
This should confirm it, we are not far away from being driven into bankruptcy by our so-called "leaders".
I suspect the downgrade has as much or more to do with the councils 'leadership' as its level of debt.
Where can you turn to vote against this insanity and possibly make a difference?
Nowhere at this election, but I have hopes better options might appear soon after once the promises of borrowing our way to a rosy future fade, and reality starts to bite. Innovation (and/or quite different political parties) arise out of desparation, and not from the status quo.
Flow on effect:
Ratings On Watercare Services Ltd. Placed On CreditWatch Negative After Similar Rating Action On Parent Auckland Council
Melbourne, Nov. 14, 2011—Standard & Poor's Ratings Services said today that it had placed its 'AA-' long term rating on Watercare Services Ltd., and the ‘AA’ rating on Watercare’s issued debt, on CreditWatch with negative implications. This rating action follows the CreditWatch negative listing of the ‘AA’ ratings on Watercare’s 100% owner, Auckland Council (AA/Watch Neg/A-1+). Watercare’s stand-alone credit profile is unchanged at ‘bbb’.Auckland Councilwas placed on CreditWatch negative following the emergence of capital-expenditure plans that, if implemented, could see the council’s debt levels exceeding 170% of operating revenues by 2013, and reaching 200% by 2015.
“The rating on Watercare is directly linked to the rating on Auckland Council, under our criteria for government-related entities,” Standard & Poor’s credit analyst Phil Grundy said. “In our opinion, there is an ‘extremely high’ likelihood that Auckland Council would provide timely and sufficient extraordinary support to Watercare in the event of financial distress to ensure the timely repayment of Watercare’s financial obligations.”
We have assessed Watercare’s stand-alone credit profile at ‘bbb’. In our view, Watercare benefits from a strong business profile, underpinned by its natural monopoly in the Auckland region and the relative stability and strength of market demand, which we expect to continue. These strengths are partly offset by what we believe is a significant financial risk profile. Watercare has a target of free funds from operations (FFO)-to-interest ratio of 2.5x, which is one of the considerations in setting market prices. We expect that Watercare will continue to set pricing at sufficient levels to maintain the company’s financial metrics at, or slightly above, the 2.5x requirement. We also expect that the ratio of FFO to debt will be maintained at about 12% or higher.
Resolution of the CreditWatch depends on the rating on Auckland Council. We expect to resolve the CreditWatch on Auckland Council during the next 90 days as the council finalizes its long-term plan. Any rating action on the council is not expected to exceed one notch, and as such, we would not expect the rating on Watercare to move more than one notch.
You have until Dec16th to protest your rating valuation down. Not only does this reduce your rates bill but also lowers your exposure to this council debt. The debt is taken out in the name of all ratepayers and the council has the right to levy this on the ratepayer base. You can lower your exposure to this debt - or move out of course - Hamilton anyone - I hear the council has it really under control down there.
As I said in another thread, Bernard - a chart of the debt held by local and regional councils on a per capita or per rating unit basis would be really useful - as I can see property becoming more attractive to purchasers in the more conservatively managed local authorities.
And, if you don't live in Auckland however - you may not be "off the hook". The new Local Government Funding Authority (LGFA) requires its members (i.e. those LAs that join it) to guarantee the debt of other participating Local Authorities;
See a good explanation here regarding the Kapiti Coast District Council's intentions to join;
http://robin.hosts.net.nz/~admin219/?p=17984#more-17984
Meantime Norman the engine driver is not to be left out....!
"The Green Party ....... Auckland can become an international city only if it focuses on clean, efficient transport." herald
And it is Doctor...the super road system will be just the thing when the all electric runabouts and hybrids come to dominate the scene...Toot tooooot.
The Auckland Council annual report shows a $55 million current provision for "weathertightness" at June 30 and a $401 million non-current provision for weathertightness.
That means they think they might have to pay the $55 million within 12 months but the $401 million over a longer time frame.
Dunedin CC can show the Aucklanders how to bury the debt when this issue rears its ugly head:
About 40% of the estimated $568 million of debt outstanding at June 30, 2011, was held outside the core council, Ms Curtin said.
"This proportion will shift significantly during fiscal 2012, when about $130 million of debt relating to construction of the stadium is transferred from the core council to a council-controlled trading operation, Dunedin Venues Ltd."
I think Dunedin's rates revenue is in the $100m range with about 53,000 ratepayers. We have had large rates rises last two years and they are trying to get next year's down from over 11%.
Count yourselves lucky Auckland!
Let's not forget, fmr-ca, all that 'investment' property that your electricity utility, Delta, also has 'off council balance sheet' from its astute purchases from a failing Hanover Finance ( Jacks Point) and Jim Boult (Luggate). The fact that officials at Delta appear to have business relationships with the vendors is just a co-incidence?
http://www.nbr.co.nz/article/dunedin-city-councils-delta-rescues-hanover-jacks-point-105123
So, in a nutshell, the current floor under Auckland council rating is it's ability to rate (for the moment) It's moments like these when I'd like to see a bit of Paul Henry again having a rant on morning tv....
All the other monopoly services need to get in quick smart and dial up their own shares from the average workers take home pay while interest rates are down where they are...
Dunedin has its famous stadium....Auckland has it's ....debts....Marlborough has a multi story carpark...mostly empty...most of the time...
Never let it be said that councils don't know how to waste other peoples money....anyone for a splurge...a V8 race or two...a sports complex and convention centre...maybe a new underground rail loop the poop...and meanwhile the retail sectors are dying a slow death as one after another the shops close for good...Ghost towns a coming to a dead zone near you...maybe spending $65000 tarting up a round a bout, as in Blenheim, will solve the problems....no!
Are our authorities stupid megalomaniac ?
In 2008 – because poor council was so stupidly enthusiastic – I had to place an ad in the Kaikoura Star asking the Kaikoura Council 14 questions how they are going to finance the planned $ 18 million council building complex (incl. Café, swimming pool and gym). Kaikoura’s rate payer population 2’200 !!!
Finally - the council abandoned the project.
Good on you Kunst.
The whole idea of funding basic infrastructure with debt is like some sort of cult. Never questioned and loved by all it's many "hangers on". All completely wrong headed, woolly (not Wolly) thinking but so ingrained it's accepted without question.
The real problem is the implied assumption that additional, new or replacement infrastructure will not be required in the future. No new schools, roads, bridges, hospitals, swimming pools - whatever. This is how Governments become insolvent. The debt begins to require bigger and bigger chunks of income, there is now even less ability to fund projects as any surplus income over direct operating costs is gobbled up by the banks and bond holders. Many are now having to borrow to meet their interest payments - basically the end game.
All so ridiculous and unnecassary. With the massive income stream they have, an outfit like the Auckland Council or a national Government could, and should, fund basic infrastructure from rates and levies. The only thing you should be borrowing for is income producing assets. But, bizarrely the trend now is to flog these off to help pay the interest bill! Are we at peak insanity yet?
The downgrade is off:
‘AA/A-1+’ Ratings On Auckland Council Off CreditWatch Negative And Affirmed; Outlook StableMelbourne, Feb. 20, 2012—Standard & Poor’s Ratings Services said today it has removed the issuer credit ratings on Auckland Council from CreditWatch with negative implications, where they had been placed on Nov. 13, 2011, and affirmed the ratings at ‘AA/A-1+’. The outlook is stable.
The rating action reflects: the strength of Auckland’s economy, the council’s strong financial management and better regional cooperation, as well as the predictable and supportive institutional framework available to local and regional governments in New Zealand.
In our view, Auckland Council’s weakening financial performance reflects the undertaking of a significant capital-expenditure program, and we believe that while the council’s operating balance remains very strong its after-capital expenditure deficit will remain weak, and contribute to the council’s increasing debt burden. Our expectation is that despite this weakening, Auckland’s credit metrics will remain consistent with an ‘AA’ rating.
“The stable outlook reflects Standard & Poor’s expectation that, after factoring in the council’s challenging capital-expenditure program, Auckland Council’s balance sheet and budgetary performance will remain consistent with the ’AA’ rating,”, said credit analyst Anna Hughes, of the Local & Regional Governments Ratings group. “Given the size of the council’s capital-expenditure program, upward pressure on the ratings is unlikely over the short-to-medium term.”
“Downward pressure would be placed on the rating if Auckland Council’s budgetary performance was significantly worse than our expectations, with an extended period of after-capital deficits in excess of 25%, or if debt increased more quickly and higher than forecast—in particular if it exceeded around 200% of revenue”, said Ms. Hughes.
“The most likely scenario for this would be if the council implemented and achieved a more aggressive capital-spending program or there were a weakening in its operation position due to a significant increase in operating expenses or a change in the council’s rating policy (e.g. revenues dropped by 5%).”
I posted this on another thread.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10786920
Can someone explain to me please why Greeces debt (as a % of GDP) is unsustainable at 160% or thereabouts yet Auckland City doesn't have a problem (yet) with debt expected to reach 200% of revenue?
Is the % of GDP just another flawed measurement?
How does this compare also to households having mortgage debt of 300% plus of income?
I know GDP isn't the same as annual revenue and would like to understand the issue further.
I think S&P's definition of "strong financial management" differs to mine.
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