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).
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