TEXT-S&P summary: Greater London Authority
(The following statement was released by the rating agency)
July 06 -
Summary analysis -- Greater London Authority ---------------------- 05-Jul-2012
CREDIT RATING: AA+/Stable/-- Country: United Kingdom
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
18-Sep-2002 AA+/-- AA+/--
The rating on the Greater London Authority (GLA) reflects Standard & Poor's Ratings Services' view of the very strong and predictable U.K. local government institutional framework which encourages budgetary stability, London's economic and political significance for the U.K. (unsolicited ratings; AAA/Stable/A-1+), and the entity's excellent liquidity position.
These factors are offset by high levels of debt and a significant decline in the "balance after capital accounts to revenue" ratio. This is mainly a consequence of the scheduled increase in debt to 2015 to part-finance Crossrail and our classification of the transfer of these borrowing proceeds to Transport for London (TfL; AA+/Stable/A-1+) as capital transfers. Crossrail is a GBP14.7 billion rail project for London and the southeast of England and is co-sponsored by the Mayor of London through TfL, and the Secretary of State for Transport through the Department for Transport.
The Localism Act 2011 bestowed new responsibilities for housing and regeneration in London on the GLA. The new responsibilities, which came into effect in April 2012, devolve the activities of the Homes and Community Agency in London to the GLA, including the management of the affordable housing program in the capital. Additionally, the GLA absorbs the activities of the London Development Agency (LDA), which was in charge of attracting investments and managing development projects in London, and the funding of a Mayoral Development Corporation, which will manage the long-term development of the Olympic Park and its surrounding area. To support these new responsibilities, the central government granted the GLA a new funding package of roughly GBP3 billion for the next three years up to 2015. The settlement includes GBP2.5 billion in grants for capital investment in housing and the development of the Olympic Park and GBP467 million in general revenue funding.
In our opinion, the GLA's additional responsibilities increase its standing beyond its original strategic mandate, enhancing its visibility within the government structure and among London citizens. However, its strategic role will still be implemented through its functional bodies that currently form part of GLA Group: TfL, the London Fire and Emergency Planning Authority (LFEPA), the Mayor's Office for Policing and Crime (MOPC), formerly the Metropolitan Police Authority, and the recently created London Legacy Development Corporation(LLDC). The LDA is no longer a functional body as it has been fully absorbed by the GLA. The new Mayoral Development Corporation or London Legacy Development Corporation (LLDC) is expected to start operations in October this year after the Olympic Games to oversee the development and regeneration of the Olympic Park and surrounding areas of east London.
Although the GLA has no legal responsibility for the financial obligations of these functional bodies, its reputation and therefore political status is largely dependent on their performance. The GLA may also feel a moral obligation to support a functional body under financial stress, although its capacity to do so is limited. Although the level of indebtedness at the functional body level has been increasing and will increase further, the related risks are somewhat offset by the political and economic importance of these bodies' services, and their supportive relationships with the relevant central government departments. For these reasons, we do not consider the debt raised by GLA's functional bodies as contingent liabilities of GLA in our analysis.
Following recent elections on May 3, 2012, Boris Johnson (Conservative Party) was re-elected Mayor of London for another period of four years. In our view, this will ensure the continuity of GLA's strategy and the close and positive relationship between the Mayor and the U.K. government, which was demonstrated by the favorable funding settlement for the GLA. Going forward, we expect this cooperative relationship to continue supporting the GLA as it implements its new powers and fulfills its responsibilities.
The GLA has historically had modest operating surpluses, averaging 1.8% over the period 2009-2012. However, as a result of the additional grants that it will receive from the central government, we expect operating surpluses to reach a peak of 32% in 2013--which will be transferred to reserves to cover future expenditure--and then fall back to a moderate level of 1% in 2015, which will result in an average ratio of 8% over the period 2011-2015. On the capital side, we expect deficits after capital accounts to remain high at about 102% on average over the same period as GLA continues the transfer of borrowing proceeds to TfL to part-finance Crossrail. However, over the next three years these deficits will begin to narrow as a result of GLA's increased revenues and the end of the Crossrail borrowing program in 2015.
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