Greater London Authority Ratings

  • We now believe the Greater London Authority (GLA)'s budgetary performance will remain sound, with positive balances after capital accounts at least until 2020, while the authority's management fulfils the mayor's objectives related to transport and housing policies.
  • At the same time, we think the GLA will continue to benefit from an exceptional liquidity position and from London's strong economy, despite uncertainty related to Brexit.
  • We are affirming our 'AA/A-1+' ratings on GLA.
  • The outlook remains negative, reflecting that on the U.K.

The rating on GLA is capped by the ratings on the United Kingdom (unsolicited 
AA/Negative/A-1+); therefore the negative outlook on GLA reflects that on the 

Downside Scenario 
We would lower the long-term rating on GLA if we lowered our long-term rating 
on the U.K. This is because we do not believe that the institutional and 
financial framework allows U.K. local and regional governments (LRGs) to be 
rated above the sovereign. Also, we now consider a downgrade of GLA, based on 
its intrinsic characteristics, to be unlikely, since we expect GLA will 
receive timely extraordinary support from the U.K. government if needed.

Upside Scenario 
We could revise the outlook on GLA to stable if we revised the outlook on the 
U.K. to stable, while the GLA performed in line with our base-case 


The affirmation primarily reflects our expectation that GLA will step up 
investments over 2018-2020 to fulfill the mayor's objectives for transport and
housing, while maintaining strong budgetary performance. GLA's operating 
revenues will increase by about 50% in 2017-2018 due to higher business rates.
This will help the authority maintain a very strong liquidity position and 
alleviate currently high debt stemming from funding major infrastructure 
projects, such as Crossrail 1 and the Northern Line Extension (NLE). In our 
view, GLA will continue to benefit from a strong economic base, despite the 
projected slowdown of GDP growth in the U.K. GLA operates under a supportive 
institutional framework with good predictability and generally adequate 
expenditure coverage. Nevertheless, its budgetary flexibility remains limited.
We now assess GLA's stand-alone credit profile (SACP) at the same level as our
'AA' long-term rating on GLA.

The ratings also continue to reflect our belief that GLA would receive timely 
extraordinary support from the U.K. government if needed, given London's 
considerable political significance and contribution to the U.K.'s economic 
and fiscal position. The government has already allocated additional revenues 
to GLA to service the debt it has raised to fund Crossrail 1 and the NLE, and 
has agreed that the authority can refinance up to £750 million of future NLE 
debt over a 50-year period with the treasury, if required.

Strong management and London's resilient economy should help GLA maintain sound budgetary performance until 2020 
GLA's reported surplus reduced in 2016-2017, with our operating margin figure 
at about 1% of adjusted operating revenues, compared with 9.4% in 2015. The 
decline was mainly due to the continuous reduction of government grants, 
illustrating--in our view--pressure on the revenue-expenditure balance, which 
weighs on the U.K.'s LRGs. That said, we see the institutional framework as 
very predictable and well balanced, especially because we view the strict 
control on local government borrowing and balanced budget requirements as a 
key strength, as demonstrated by GLA's positive operating balances in recent 

We view GLA's management as strong. We believe that the authority will stick 
to a detailed, well-documented, and prudent long-term financial plan covering 
the next four years (2018-2021). The volatility from business rates, which now
accounts for about 70% of GLA's adjusted operating revenues in our base case 
through 2020, has made financial planning more difficult. Nevertheless, we 
believe GLA's planning is based on realistic and appropriate assumptions, 
given uncertainties surrounding the U.K. economy and risk of appeals on the 
business rates. Also, we now have more clarity about the schedule for the 
affordable housing program over the mayor's term, which will likely account 
for 50% of GLA's investment spending in 2020. We view as positive that GLA 
will likely receive grants related to housing in advance, which supports our 
projections of surpluses after capital accounts in our current 2018-2020 base 
case. On the operating expenditure side, we expect GLA will keep a tight rein 
on its corporate expenditure alongside the moderate interest burden we project
over that period. We also acknowledge GLA's cautious debt and liquidity 
management, as demonstrated by its willingness to hold a high level of 
liquidity and secure all funding needed during the mayor's term well in 

We continue to assess London's economy as very strong in a national and 
international comparison. London's gross value-added (GVA) per capita is close
to £45,000. We forecast that GVA growth will remain steady and above the 
national average over 2018-2020, at 1.9% per year, in line with Consensus' 
forecast for London. Nevertheless, this growth rate is lower than in previous 
years, due to the U.K. economy's likely slowdown in the context of Brexit. Our
view of London's solid socio-economic and demographic profiles supports our 
anticipation of continuous growth of council tax revenue, translating into 
total operating revenue growth, which we forecast will average about 2.5% 
annually through 2020. We also anticipate controlled growth of operating 
expenditure at about 1.5% over that period, leading to positive operating 
margins of about 2% per year on average, close to our previous base-case 
forecast. This is also underpinned by our belief that allocations of business 
rates for GLA's functional bodies will likely remain inferior to revenue 
collected. We continue to exclude from our calculation about £3 billion of 
non-legally-owned operating revenue that GLA is required to transfer to its 
functional bodies. On the capital side, we expect capital income will match 
investment efforts, in particular to deliver the mayor's affordable housing 
program; this explains our revised base-case projection of surpluses after 
capital accounts of about 2% per year over 2018-2020. We expect investments 
will increase by the end of the mayor's term in line with our former base 
case, with close to £1 billion of capital expenditure in 2020 compared with 
about £500 million reported at year-end 2017.

Given the substantial investment effort anticipated, and GLA's very limited 
ability to reduce transfers to the functional bodies (chiefly, the Mayor's 
Office for Policing and Crime, and Transport for London), we continue to view 
GLA's budgetary flexibility as weak. This assessment also takes into 
consideration the authority's limited autonomy over its revenue base, as is 
the case for other U.K. LRGs, whose operating revenue came mainly from state 
grants in 2016-2017 (close to 60% and set to decrease in the next few years). 
We continue to see GLA's modifiable revenue as currently limited to council 
tax, which will account for less than 30% of its operating revenue in our 
revised 2018-2020 base case.

Debt will likely remain high, but liquidity is exceptional and contingent liabilities very low 
The demands of London's growing economy and population have propelled the 
current phase of investment in transport infrastructure, which has led to the 
GLA's high debt.

GLA's debt totaled £3.7 billion as of March 31, 2017, after increasing 
primarily to fulfil GLA's commitment to partly finance Crossrail 1. Although 
GLA has started to reduce its Crossrail 1-related debt, we expect that its 
debt will increase to £4.2 billion in 2020 as a result of its commitment to 
finance the NLE and housing transactions. The latter differ from the 
affordable housing program, which is meant to be funded by capital grants from
the U.K. central government. We foresee debt to operating revenues staying 
below 130% through 2020, up from 123% in 2017, in line with our former base 

We consider GLA's contingent liabilities to be very low. The U.K. central 
government ultimately bears the risks on Crossrail 1, and Transport for London
bears the risks directly associated with cost overruns on the NLE. Also, we 
would expect Transport for London will receive financial support from the U.K.
central government in case of financial distress.

We view the GLA's overall liquidity position as exceptional, based on what we 
view as its very strong debt-service coverage; although we recognize that 
future funding needs remain large.

Over the next 12 months, we estimate that GLA will have sufficient free cash 
reserves and short-term investments (after allowing for some loss of value in 
a stress scenario and coverage of part of the investment program) to 
comfortably cover the next 12 months' debt service by about 6x.

We also view GLA as having exceptional access to external liquidity, compared 
with international peers. This is primarily due to the U.K. government's 
Public Works Loan Board, which can provide funding to GLA within 48 hours of 
an application.


Table 1

Greater London Authority Key Statistics
--Fiscal year end March 31--
(Mil. £)201520162017bc2018bc2019bc
Operating revenues2,2822,2053,1483,2183,311
Operating expenditures2,0662,1863,1193,1593,220
Operating balance21619295991
Operating balance (% of operating revenues)
Capital income1,007695569689945
Capital expenditures569512588597982
Balance after capital accounts6542021015054
Balance after capital accounts (% of total revenues)
Debt repaid22028717411797
Gross borrowings278315344324215
Balance after borrowings61112140340(76)
Modifiable revenues (% of operating revenues)36.436.626.126.126.3
Capital expenditures (% of total expenditures)21.619.015.915.923.4
Direct debt (outstanding at year-end)3,7073,7363,8834,0454,245
Direct debt (% of operating revenues)162.5169.4123.4125.7128.2
Tax-supported debt (outstanding at year-end)3,7073,7363,8834,0454,245
Tax-supported debt (% of consolidated operating revenues)162.5169.4123.4125.7128.2
Interest (% of operating revenues)
Local GDP per capita (£)43,69044,73945,48046,34446,901
National GDP per capita (£)28,76229,54630,25530,83931,628