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Fitch Affirms Rotorua Lakes Council at 'AA-'; Outlook Stable
March 31, 2017 / 7:17 AM / 8 months ago

Fitch Affirms Rotorua Lakes Council at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY/HONG KONG, March 31 (Fitch) Fitch Ratings has affirmed Rotorua District Council's (which operates as Rotorua Lakes Council) Long-Term Local-Currency Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook and its Short-Term Local-Currency IDR at 'F1+'. The ratings reflect support from New Zealand's robust institutional framework for local and regional councils and the council's improving fiscal performance, strong management and sound socio-economic profile amid debt metrics that remain weaker than the average for 'AA' rated peers. However, Fitch expects the debt metrics to improve over the long term. KEY RATING DRIVERS New Zealand's institutional framework for local authorities is an important positive rating factor for Rotorua Lakes Council. This is demonstrated by transparent reporting and financial disclosure; strong controls and supervision; a high level of predictable own-source revenues (rates) with wide rate-setting powers; strong creditor protection, with borrowings generally secured over the council's rating base; and limited labour intensive responsibilities, as health and education are provided by the central government. Fitch calculated an operating margin of 26.2% in the financial year ending June 2016 (FY16), up from 24.3% in FY15. Fitch sees the council's financial management as a strength, with long-term projections consistent with local peers and well above similarly rated international peers. Rotorua Lakes Council has addressed previously weak performance through a mix of restructuring, expense cuts and revenue increases. Fitch believes financial forecasts, as outlined in council's annual and long-term plans, are achievable, with operating margins forecast to average 28.0% over the four years to FY20. Tourism is the largest industry in the small but economically diverse region and remains a key component in Rotorua Lakes Council's long-term strategic vision. Tourism supported strong GDP growth of 3.9% to NZD2.7 billion in the year to end-2016. Tourist expenditure in the district rose 4% to NZD773 million in the year to end-January 2016, against a national growth rate of 7%. The unemployment rate was 5.8% at end-2016, and has historically been above the national rate, although improved by 1.7pp over the year. The region does not have any significant concentration in any one employer due to the large tourism sector, which mitigates idiosyncratic risk. Rotorua Lakes Council's debt/current revenue ratio is high relative to that of its international 'AA' peers, but is supported by the council's adequate financial flexibility, including predictable revenue and access to funding from the New Zealand Local Government Funding Authority (LGFA). The council is committed to lowering debt levels and its forecast peak levels have declined between long-term plans. Fitch calculates a debt/current revenue ratio of 172% peaking at FYE20 then declining through to FYE25. Net overall risk ratios are in line with highly rated international peers, as the council has minimal contingent liabilities or guarantees, which Fitch includes in these ratios. Strong capex management is important to achieve the council's financial projections. The council forecasts capex of NZD320 million over 10 years to FY25; this is 85% of projected capex contained in RLC's long-term service plans for its infrastructure assets. Rotorua Lakes Council's historic performance mitigates the risk of higher-than-expected capex. The council has been operating below its capex budget as it has completed projects below budget, its assets last longer than scheduled and some projects have not proceeded. RATING SENSITIVITIES Rotorua Lakes Council's ratings could come under pressure if its budgetary performance deteriorates unexpectedly and the debt/current balance is above 10 years for a prolonged period. Weakening fiscal discipline and a failure to control capex, resulting in debt/current revenue ratios approaching 200%, would lead to negative rating action. Positive rating action would require the council to sustain high current margins in excess of 20% and its debt/current revenue ratio moving towards 125%. The council would need to demonstrate a sustained outperformance in its margins relative to less leveraged peers, given its high relative debt level. Contact: Primary Analyst John Birch Director +62 2 8256 0345 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Samuel Kwok Associate Director +852 2263 9961 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Summary of Data Adjustments - The financial data used in Fitch's calculations are taken from Rotorua Lakes Council's annual reports. We have made the following adjustments to the reported numbers: - Depreciation and impairment of property, plant and equipment are excluded from capital expenses. - Cash flow for the purchase of property, plant and equipment and intangible assets is included in capital expenses. - Cash flow from the sale of property, plant and equipment is included in capital revenue. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on 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 _id=1021428 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 <a href="">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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