Wellington City Council Outlook Revised To Positive After Similar Action On New Zealand; 'AA/A-1+' Ratings Affirmed

OVERVIEW
  • On Jan. 31, 2019, we revised the rating outlook on New Zealand to positive from stable.
  • Consequently, we are revising our outlook on Wellington City 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 the 'AA/A-1+' ratings on the council.
  • Although Wellington City Council'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 New Zealand's 
Wellington City Council to positive from stable. At the same time, we affirmed 
our 'AA/A-1+' long- and short-term issuer credit ratings on Wellington City 
Council.


OUTLOOK
The positive outlook on Wellington reflects that on the sovereign meaning that 
we could raise the ratings on both New Zealand and Wellington within the next 
two years. 

Downside scenario
We could revise the outlook on Wellington to stable if we take a similar 
action on New Zealand, or if Wellington's own creditworthiness deteriorates 
substantially from our current expectations. This could occur if we perceive 
Wellington's financial management is weakening, resulting in a substantial 
weakening in its financial position and liquidity coverage.



RATIONALE
The revised outlook 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 
Wellington has a stand-alone credit profile higher than the sovereign's, we 
cap our rating on Wellington to that of the sovereign's because Wellington 
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 
Wellington, could maintain stronger credit characteristics than the sovereign 
in a stress scenario. 

We expect Wellington's budgetary performance to deteriorate during the next 
few years as the council increases it capital expenditure. This will result in 
higher debt levels. New Zealand's institutional settings and Wellington's 
financial management, economy, and liquidity continue to support its credit 
profile.

--Financial management and institutional framework support ratings; economy 
remains strong--
The institutional framework within which New Zealand councils operate is a key 
strength supporting Wellington City's credit profile. The New Zealand local 
government system promotes a strong management culture, fiscal discipline, and 
high levels of financial disclosure among local councils. In addition, the 
framework is supportive of councils' rate-collection abilities. This system 
allows Wellington to support higher debt levels than some of its international 
peers can tolerate at the current rating.

In our opinion, Wellington's financial management is strong, similar to most 
New Zealand councils. In its recent 2018-2028 long-term plan, the council is 
focusing on improving the city's resilience to natural disasters, following 
the 2016 Kaikoura earthquakes, including upgrades to its Town Hall. In 
addition, an increasing population has put pressure on water infrastructure 
and public transport, and the council is working with the Crown and Greater 
Wellington Regional Council on this issue.

Wellington prepares a long-term plan every three years, setting an important 
forward-looking approach to prudent financial management, which sets an 
important baseline for the council's operating and capital-expenditure 
requirements, and its funding strategy. Debt and liquidity policies are 
prudent, with no issuance of foreign-currency and interest exposure being 
mostly hedged. 

Wellington is the capital city of New Zealand. Supporting Wellington City's 
economy is its exposure to the central government's departments and 
public-sector jobs, which in an economic downturn, are more unlikely to be 
affected than private-sector employment. Wellington City has the highest 
proportion of tertiary-qualified residents in New Zealand and remains one of 
the wealthiest regions in the country. GDP per capita was around US$70,500 on 
average during the three years from 2015 to 2017.

--After-capital account deficits are widening and debt levels are rising, 
reflecting a large capital program during the next few years--
We expect Wellington's after-capital account to deteriorate to about 14% of 
total revenues during the next three years compared with about 3% between 2012 
and 2016. These wider deficits reflect the council's large infrastructure 
projects, which include upgrades to the Town Hall, a new convention center, 
and water and transport infrastructure. We forecast Wellington to spend about 
NZ$190 million on capital expenditure, or 33% of total expenditure between 
2019 and 2021, up from NZ$135 million historically, or 22% of expenditure. In 
2017, Wellington achieved its highest capital expenditure, recorded at NZ$170 
million.

The council's operating balance will remain in strong surplus of about 17.7% 
of operating revenues from 2017 to 2021. Supporting the council's operating 
position is its large commercial rating base compared with domestic peers'. 
The council currently derives around 55% of its rates from residents, with the 
remainder from its commercial industries.

Reflecting wider deficits, Wellington's debt metrics would deteriorate 
moderately through to 2021. We forecast the council's total tax-supported debt 
to be 158% of operating revenues in 2021, up from 127% in 2018. In turn, we 
expect interest expenses to gradually increase in line with this, and average 
about 5.9% of operating revenues from 2018 to 2020.

We estimate that Wellington's liquidity sources--average free cash and liquid 
assets (after haircuts), and unutilized bank lines--to average about NZ$189 
million during the next 12 months, covering 130% of its debt service. 
Wellington's debt service during the next 12 months includes NZ$30 million in 
bonds, NZ$85 million of short-term paper, and about NZ$29 million in interest 
payments.

We expect the council's modifiable revenues to be about 95% of operating 
revenues between 2017 and 2021, providing the council with a high degree of 
budgetary flexibility. Modifiable income streams such as property rates and 
user charges are key sources of council income.

Wellington's contingent liabilities are low. The council's insurance policies 
and adequate provisions limit its exposure to contingent liabilities that 
could arise from natural disasters. In addition, supporting our assessment is 
the support the Crown is likely to provide in the event of a natural disaster. 
The district is susceptible to earthquakes, as evidenced by the 2016 Kaikoura 
Earthquake.

We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000 pr@ademcetinkaya.com