Greater Wellington Regional Council Outlook Revised To Positive After Similar Action On New Zealand; Ratings Affirmed

OVERVIEW
  • On Jan. 31, 2019, we revised the rating outlook on New Zealand to positive from stable.
  • Consequently, we are revising our rating outlook on Greater Wellington Regional Council to positive from stable because the ratings on the council are constrained by the long-term foreign-currency rating on New Zealand.
  • At the same time, we are affirming our 'AA/A-1+' ratings on the council.
  • Although Greater Wellington's stand-alone credit profile is currently higher than New Zealand's, we believe the council could not withstand a default scenario better than the sovereign could, and that the council's credit metrics would deteriorate in line with those of the sovereign in the event of a distress scenario.
RATING ACTION
On Feb. 1, 2019, S&P Global Ratings revised its outlook on the long-term 
ratings on New Zealand's Greater Wellington Regional Council to positive from 
stable. At the same time, we affirmed our 'AA/A-1+' long- and short-term 
issuer credit ratings on Greater Wellington Regional Council. 


OUTLOOK
The positive outlook on Greater Wellington reflects that on the sovereign 
because the ratings on the council are constrained by the long-term 
foreign-currency rating on New Zealand. We could raise the ratings on Greater 
Wellington within the next two years should the same occur for New Zealand.

Downside scenario
We could revise the outlook on Greater Wellington to stable if we take a 
similar action on New Zealand, or if Greater Wellington's own creditworthiness 
deteriorates substantially from our current expectations. This could occur if 
the council were to change its policy direction in such a way that it weakened 
its financial position substantially and weakened our view of its financial 
management.



RATIONALE
The outlook revision reflects a similar action on the New Zealand sovereign 
(see "New Zealand Outlook Revised To Positive On Improving Fiscal Position; 
'AA+' LC And 'AA' FC Ratings Affirmed," published Jan. 31, 2019). Although 
Greater Wellington has a standalone credit profile higher than the 
sovereign's, we cap our rating on Greater Wellington to that of the 
sovereign's because it does not meet the conditions to be rated above the 
sovereign in accordance with our criteria. We do not believe any New Zealand 
local council, including Greater Wellington, could maintain stronger credit 
characteristics than the sovereign in a stress scenario. 

We expect Greater Wellington's budgetary performance to improve, with 
after-capital account surpluses during the next two years because of higher 
rates and user charges, and large post-earthquake insurance receipts. We 
expect the council to then incur a large deficit as it spends these insurance 
receipts on new infrastructure. This will result in the debt–to-revenue ratio 
temporarily falling during the next two years compared with historical levels. 
Our ratings reflect the country's supportive institutional settings and the 
council's wealthy economy, and strong financial management and liquidity 
coverage.

--A supportive institutional framework, strong financial management, and 
wealthy economy support Greater Wellington's creditworthiness--
We continue to cap our ratings on Greater Wellington at the level of our 
long-term foreign currency rating on New Zealand (AA/Positive/A-1+) because we 
believe the council could not withstand a default scenario better than the 
sovereign could, and that the council's credit metrics would deteriorate in 
line with those of the sovereign in the event of a distress scenario.

The institutional framework within which New Zealand local governments operate 
is a key strength supporting the council's credit profile. We believe the 
framework is one of the strongest and most predictable globally. The New 
Zealand local government system also promotes a strong management culture, 
fiscal discipline, and high levels of financial disclosure among local 
councils. The system allows Greater Wellington to support higher debt levels 
than some of its international peers can tolerate at its current rating.

Greater Wellington's key credit strength is its experienced and stable 
financial management. Greater Wellington's finance team has demonstrated 
strong management capacity, including its execution and management of major 
infrastructure projects. Like all New Zealand councils, Greater Wellington 
published a triennial long-term plan in 2018, setting out its priorities for 
the years ending June 30, 2018 to 2028. The plan sets out four key strategic 
priorities: improving the quality of water, water supply infrastructure, 
building regional resilience, and improving public transport. The council is 
able to adopt budgets and long-term plans without delay, and it remains 
focused on being financially disciplined with its approach to borrowing and 
insurance policies.

We consider the council's debt and liquidity policies to be prudent. The 
council does not borrow in foreign currency, and interest exposure is mostly 
hedged. In managing liquidity, Greater Wellington undertakes long-term, 
monthly, and daily cash-flow forecasts. 

We believe governance and oversight of its council-controlled trading 
organization are well managed. Greater Wellington's commercial assets are held 
under WRC Holdings Ltd., which is wholly owned by the council. WRC Holdings' 
main operating companies in the group are CentrePort Ltd. and Greater 
Wellington Rail Ltd. Each year, WRC Holdings Ltd. provides to Greater 
Wellington, as 100% shareholder, a Statement of Intent for the WRC Holdings 
Group.

Following on from the Kaikoura earthquakes in November 2016, CentrePort 
continues to receive insurance progress payments for the significant damage to 
infrastructure and commercial properties. The repair program is being funded 
through these insurance payments. CentrePort's short- to medium-term strategy 
will focus on restoring its pre-earthquake operational capacity and building 
resilience.

The region's wealthy and diversified economy supports our ratings on Greater 
Wellington. Greater Wellington has the second-largest economy in New Zealand, 
with economic activities ranging from public services, screen, digital and 
information and communication technologies, to food and tourism. Greater 
Wellington contributes about 14% of New Zealand's GDP and has more than 10% of 
New Zealand's population. The region's economic structure and performance are 
significantly stronger than the broader New Zealand economy. 

We estimate Wellington's GDP per capita to average about US$48,500 from 2015 
to 2017, with the region experiencing stable economic growth. Population 
growth of around 1.6% per annum continues to drive housing and construction 
demand. As the capital of New Zealand, Wellington is home to the nation's 
central government.

The region benefits from high household incomes and low unemployment. A 
significant proportion of the population works in the public sector, resulting 
in constituents who are highly educated and among the wealthiest in New 
Zealand.

--Higher revenues leading to temporary improvement in budgetary performance 
and debt-to-revenue ratio before receding; liquidity remains strong--
We expect Greater Wellington's budgetary performance and debt burden to 
improve during the next two years as a result of higher property rates and 
user charges as well as the insurance receipts following the 2016 earthquake. 
Following this period, we expect the council to incur a large deficit as it 
spends these insurance proceeds on new infrastructure. Timing issues for 
insurance and grant receipts, and earthquake recovery capital works make the 
budgetary performance somewhat volatile. 

Alongside increased property rates, fees, and charges, the 2018 implementation 
of the Public Transport Operating Model will result in user charges collected 
almost doubling in the 2019 fiscal year from the previous year, increasing the 
council's operating revenues. Greater Wellington now receives all public 
transport fare revenue. In addition to user charges and rates, operating 
revenue growth in 2018 has also benefited from other revenues like insurance. 
Based on these developments, we expect average operating surplus of 9% of 
operating revenues between 2017 and 2021. 

In addition to higher operating revenues, insurance receipts and capital 
grants will result in after-capital surpluses of about 5% of total revenues 
during 2019 and 2020. We consider the improvement in these ratios will see a 
temporary reduction in forecast borrowing needs compared with the past until 
2020 because Greater Wellington will incur a large after-capital account 
deficit in 2021 of about 26% of total revenues as it spends its insurance 
receipts on new infrastructure. We forecast average after-capital account 
deficit of 3% of total revenue between 2017 and 2021, slightly higher than our 
previous forecast of 1%.

Our assessment of Greater Wellington's debt burden captures the debt and 
revenues of its council-controlled trading organization, WRC Holdings Ltd., 
and its subsidiaries. Its after-capital account surpluses, lower WRC Holdings 
borrowings, and strong increases in operating revenues will reduce the 
council's total tax-supported debt-to-operating revenues to about 80% in 2019 
from 104% in 2018. However, this improvement will be temporary, with the large 
2021 deficits forecast to result in total tax-supported debt to operating 
revenues returning to levels similar to those achieved in 2018. We forecast 
interest expenses to remain above 5% of operating revenue between 2018 and 
2020.

Greater Wellington's liquidity position remains strong. During fiscal 2019, at 
the consolidated group level, the council will have NZ$144 million of debt 
maturing and interest expenses of NZ$20 million, which will be more than 
covered by its cash holdings and available committed undrawn credit facilities 
of NZ$274 million. The facilities plus forecast unrestricted cash holdings 
during fiscal 2019 would give Greater Wellington a comfortable debt-servicing 
coverage ratio of 200%.

Supporting Greater Wellington's revenue flexibility is the council's 
unrestricted ability to set property rates, fees, and charges. Modifiable 
revenues remain stable at just about 57% of the council's consolidated 
revenues, which is lower than the majority of domestic peers' around New 
Zealand. This is a result of Greater Wellington's high dependence on 
government transfers and grants, and commercial revenues. Receipts from 
trading subsidiaries, which are a significant contributor to the council's 
annual budget, are not as certain and do not offer the flexibility that rates 
provide.

On the expenditure side, Greater Wellington's responsibilities are highlighted 
in its recently published long-term plan, which focuses on resilience and 
growth-related infrastructure projects. With the council's large 
infrastructure projects in the pipeline, we do not foresee any added budgetary 
flexibility. Key projects include the rebuild and strengthening of the 
CentrePort infrastructure, a cross-harbor water supply, flooding-prevention 
measures, and transport transformation program, "Let's Get Wellington Moving". 

We forecast the council, including WRC Holdings, will spend about NZ$200 
million per year, on average, on capital projects over the next three years. 
This is equivalent to about 30% of total expenditure between 2019 and 2021. In 
the past, Greater Wellington's capital expenditure was about NZ$60 million per 
year.

Similar to other rated New Zealand local governments, the council's contingent 
liabilities are small, and support its credit quality. While Greater 
Wellington's quantifiable contingent liabilities represent less than 2% of the 
council's operating revenues, the area is prone to natural disasters such as 
the 2016 earthquake. We consider that the impact of natural disasters on the 
council's credit profile is limited due to its comprehensive insurance 
policies, and that the Crown would likely provide extraordinary support to the 
region in the event of a natural disaster.


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