October 27, 2017 / 9:38 AM / a year ago

Fitch Affirms Hamilton City Council at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 27 (Fitch) Fitch Ratings has affirmed Hamilton City Council's (Hamilton) Long- and Short-Term Local-Currency Issuer Default Ratings (IDR) at 'AA-' and 'F1+', respectively. The Outlook is Stable. At the same time, Fitch has affirmed the rating on Hamilton's outstanding senior secured notes at 'AA-'. The rating affirmations reflect the strong institutional framework for local and regional councils in New Zealand, the strong economic environment as well as Hamilton's solid management and administration, robust fiscal performance and weaker debt metrics. Debt metrics have improved but remain weaker than for other highly rated international peers. KEY RATING DRIVERS Robust Institutional Framework: New Zealand's institutional framework for local authorities is an important positive ratings factor for Hamilton. This is demonstrated by its transparent reporting and financial disclosure, strong controls and supervision, a high level of own-source revenues (rates) with wide rate-setting powers, and limited responsibilities (health and education are provided by the central government). Positive Financial Performance: Hamilton had current margins of 22.6% in the financial year ended 2017 (FY17), which was 2.6 percentage points (pp) more than previous year and also the highest since 2013, according to Fitch's calculations. The margin was well above that of international peers, and driven by a stable increase in rates revenue and higher-than-expected revenue from fees and charges. Fitch expects the fiscal performance to continue due to the healthy financial management practices adopted by Hamilton. Strong Economic Performance: Hamilton is a fast-growing, diversified, services-led economy that is underpinned by large government activity in science, education and health. The city's population continued to grow and reached around 161,200 by FYE16 and its GDP grew 3.3% to NZD7.7 billion in FY17, outpacing the national growth of 2.8%. Hamilton's unemployment rate of 6.0% at FYE16 was 0.6pp down from the previous year. The employment market in Hamilton has been improving gradually over the years, and Fitch expects the trend to continue. Debt Likely to Remain High: Hamilton's debt-to-current revenue ratio is high relative to that of its international peers and reached 205.5% by Fitch's calculation. The debt level is supported by access to funding from the New Zealand Local Government Funding Authority (LGFA) (AA/Stable), good creditor protection and strong fiscal performance that leads to highly predictable revenue. Hamilton is seeking ways to finance future infrastructure needs, including by participating in the Housing Investment Fund (HIF) established by the New Zealand government. However, the expected contribution of NZD272 million from the fund will add to existing high council debt. Fitch will review the conditions and structure of the additional debt taken as part of the HIC initiative and the impact this will have on projected debt burden and coverage ratios to assess the available headroom under the present rating. Visible Capex Requirements: The council publishes a 30-year infrastructure plan and sets out a 10-year plan, which it revisits every three years to update fiscal performance forecasts, including capex. The practice helps to visualise future council capex needs with higher precision. Hamilton is now reviewing its new 2018-2028 10-year plan to incorporate changes in the council's financial strategy. The council expects to adopt the new 10-year plan in mid-2018. RATING SENSITIVITIES Budgetary Performance: Hamilton's ratings could come under pressure if its budgetary performance were to deteriorate significantly, with current margins dropping to below 12%. Significant deterioration in the debt ratios from the HIC initiative could also place pressure on the ratings. Current Balance Improvement: Positive rating action would require Hamilton to generate sustained high current margins exceeding 25%, and have a debt-to-current revenue ratio of below 200%. The council would need to demonstrate a sustained outperformance in its margins relative to less leveraged peers, which would mitigate its high debt, before positive rating action can be considered. Contact: Primary Analyst Lorraine Liu Associate Director +852 2263 9929 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Samuel Kwok Associate Director +852 2263 9983 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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