Whangarei District Council Outlook Revised To Positive Following 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 outlook on the long-term ratings on Whangarei District 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+' long- and short-term issuer credit ratings on Whangarei.
  • Although Whangarei's stand-alone credit profile is currently higher than New Zealand's, we believe the council could not withstand a distress scenario better than the sovereign, and that the council's credit metrics would deteriorate in line with those of the sovereign in a distress scenario.
RATING ACTION
On Feb. 1, 2019, S&P Global Ratings revised its outlook on New Zealand's 
Whangarei District Council to positive from stable. At the same time, we 
affirmed our 'AA/A-1+' long- and short-term issuer credit ratings on 
Whangarei.


OUTLOOK
The positive outlook on Whangarei 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 Whangarei within the next 
two years should the same occur for New Zealand.

Downside scenario
We would revise the outlook on Whangarei to stable if we were to take a 
similar action on New Zealand, or if Whangarei's own creditworthiness 
deteriorates substantially from our current expectations. The latter could 
occur if the council's after-capital deficits widened significantly and over a 
longer time frame than we currently forecast, resulting in a greater rise in 
debt. Such actions might also cause us to reassess our view of Whangarei's 
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," Jan. 31, 2019). Although Whangarei has 
a stand-alone credit profile higher than the sovereign's, we cap our ratings 
on Whangarei at that of the sovereign's because Whangarei 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 Whangarei, could 
maintain stronger credit characteristics than the sovereign in a stress 
scenario. 

We expect Whangarei's high level of fiscal flexibility, strong financial 
management, and New Zealand's excellent institutional settings to support its 
credit profile. Meanwhile, we expect the council to increase its capital 
expenditure during the next few years, which will lead to a period of 
after-capital deficits and a modest rise in debt. Debt service coverage is 
lower than previously; this is a function of the debt maturity profile and not 
indicative of a weakening in liquidity management.

Ratings remain supported by robust financial management and New Zealand's 
excellent institutional framework
Whangarei's fiscal processes are credible and well established, with the 
council preparing long-term plans every three years, annual plans in the 
intervening years, and audited annual reports, in line with New Zealand 
requirements. The council's treasury and risk management policy sets prudent 
limits on external borrowing, liquidity, and interest rate risks. Whangarei 
borrows only in local currency, in accordance with legislation. Like all New 
Zealand councils, Whangarei is governed by an elected group of councilors, led 
by a mayor. The councilors delegate day-to-day management to a full-time chief 
executive.

We expect Whangarei's local economy to continue to perform soundly. The 
district had an average GDP per capita of about US$31,400 over 2014 to 2016, 
according to figures from New Zealand's Ministry of Business, Innovation and 
Employment. This is high by international standards but a little lower than 
New Zealand's three-year average of around US$39,800. The local economy is 
somewhat reliant on manufacturing, which accounts for about 23% of local GDP. 
Whangarei is home to the only oil refinery in New Zealand and is a recognized 
boatbuilding and marine engineering hub. Its population in 2017 was 89,700.

The institutional framework within which New Zealand local governments operate 
is a key factor supporting Whangarei's credit profile. We believe this 
framework is one of the strongest and most predictable globally. It promotes a 
robust management culture, fiscal discipline, and high levels of disclosure.

High level of budgetary flexibility helps to offset projected deficits and 
weaker debt service coverage
Like all New Zealand councils, Whangarei prepares a triennial long-term plan 
that sets out its priorities for the years ending June 30, 2019 to 2028. The 
draft budget calls for capital spending of NZ$68.8 million in fiscal 2019 (or 
35.5% of total expenditures that year) and NZ$87.1 million in fiscal 2020 (or 
40.6% of total expenditures that year). Meanwhile, revenue from rates and 
council fees and charges should grow at a moderate pace over the next 10 
years. 

As a result, we expect Whangarei's after-capital balance to tip into deficit 
in fiscal 2018 and remain there for the next few years, with a relatively 
large deficit of 14.8% of adjusted total revenues projected for fiscal 2020. 
We expect operating surpluses to remain robust, averaging about 22.1% of 
adjusted operating revenues over the next three fiscal years. The outturn for 
fiscal 2017 was stronger than we previously forecast, partly because of 
higher-than-expected receipts from development contributions and unbudgeted 
asset sales.

Whangarei's total tax-supported debt as a proportion of consolidated operating 
revenues is likely to grow to 152% by the end of fiscal 2020, up from 134% at 
the end of fiscal 2017. This is because some of the capital works program will 
be funded by new borrowings. Similar to many of its domestic peers, Whangarei 
typically under-delivers on its capital plans each year. As such, our 
base-case forecasts incorporate a 25% haircut to budgeted capital expenditure 
in fiscal 2018 and 20% thereafter, roughly in line with the council's 
historical execution.

Supporting the ratings on Whangarei is the council's very high level of 
budgetary flexibility. We estimate that about 94% of the council's operating 
revenues are modifiable, which means they can be raised or lowered at the 
council's discretion. Although the focus of the council's infrastructure 
strategy over the next decade will be renewals of core infrastructure, like 
roads and storm-water assets, the capital works budget also contains a mix of 
projects to improve community amenity. The largest single projects over the 
next three years are a new civic center for Whangarei, which is budgeted at 
NZ$37 million, and a replacement of the Whau Valley water treatment plant, 
which is budgeted at NZ$21.3 million.

We expect the council's debt servicing needs during the 12 months from April 
2018 to comprise NZ$10 million in maturing commercial paper (which is 
regularly rolled over), NZ$19 million in notes maturing in March 2019, and 
about NZ$8.4 million in interest payments. We also expect the council to 
maintain an average of about NZ$11.1 million in free cash plus access to an 
undrawn NZ$30 million facility with Bank of New Zealand. As a result, we 
estimate that Whangarei's free cash and available committed bank lines stand 
at about 110% of its debt service needs for the 12 months from April 2018. 
This ratio is weaker than it was at the same time the preceding year, when it 
stood at 146%. We note that in the past, Whangarei has prefunded upcoming 
maturities and held the proceeds in linked term deposits, reducing its 
refinancing risk. If it continues with this strategy, debt service coverage 
may improve throughout the year.

Apart from cash, Whangarei does not hold other liquid financial assets. We 
consider the council's access to external liquidity to be satisfactory. While 
New Zealand's capital markets are comparatively liquid, they lack depth, given 
their relatively small size. During the severe market dislocation of 2008 and 
2009, some New Zealand councils had difficulty issuing unrated commercial 
paper. Similar to most of its domestic rated peers, Whangarei sources the 
majority of its external debt through the New Zealand Local Government Funding 
Agency (LGFA).

Whangarei's contingent liabilities are limited. The civil case between 
Whangarei and a group of engineering contractors was resolved in January 2018, 
regarding faulty infrastructure built at a new development at Marsden City. 
Whangarei is guarantor to a number of small community and sporting 
organization bank loans totaling NZ$250,000. The council also has various 
outstanding claims against it under the Weathertight Homes Resolution Service, 
for which it has allowed a contingency of NZ$1.55 million. Like many of its 
domestic peers, Whangarei is a shareholder and joint guarantor of the LGFA's 
borrowings. We consider it very unlikely that this guarantee will be activated 
in the near future.
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