Swedish City of Boras 'AA+/A-1+' And 'K-1' Ratings Affirmed; Outlook Stable

  • The September 2018 elections resulted in another minority government for Borås, but we do not anticipate major changes to the city's long-term financial strategy.
  • We expect management will remain committed to budgetary discipline and counteract pressure on its financial position, despite expenditure pressure and high investments.
  • We are affirming our 'AA+/A-1+' and 'K-1' ratings on Borås.
  • The outlook is stable.
RATING ACTION
On Feb. 15, 2019, S&P Global Ratings affirmed its 'AA+' long-term and 'A-1+' 
short-term issuer credit ratings on the Swedish City of Borås. The outlook is 
stable.

At the same time, we affirmed our 'K-1' Nordic regional scale rating on the 
city.


OUTLOOK
The stable outlook reflects our expectation that Borås will remain committed 
to budgetary discipline and post limited deficits after capital accounts in 
our forecast period through 2021, despite high investments. We also expect 
management will maintain its prudent debt and liquidity management, keeping 
its debt burden at moderate levels throughout the forecast period. 

Downside scenario
We could consider a downgrade if we observed a structural deterioration in 
budgetary performance, caused by an increasing demographic burden and high 
investments, and to which management failed to respond in a timely and 
sufficient manner.

Upside scenario
We could consider an upgrade if Borås improved its cost control and 
implemented more conservative debt and liquidity policies, resulting in a 
structural improvement of the budgetary performance, with operating balances 
exceeding 5% of operating revenues, while improving its internal liquidity 
position.


RATIONALE
The rating on Borås reflects our view that the city will maintain its current 
fiscal position, supported by Sweden's extremely predictable and supportive 
institutional framework and a management committed to budgetary discipline and 
risk-minimizing debt and liquidity management. In our view, this mitigates the 
risks stemming from pressure on the budgetary performance caused by 
demographic factors and high investments, as well as an increasing debt 
burden.
 
 
Strong management and Sweden's institutional framework will support Borås' 
fiscal position
 
We consider Sweden's institutional framework for local and regional 
governments (LRGs) as extremely predictable and supportive. This is a key 
component of our ratings on Swedish LRGs, as the system has a high degree of 
institutional stability, and a revenue and expenditure management based on a 
far-reaching equalization system and local tax autonomy.

Owing to the comprehensive equalization system that evens out wealth among 
Swedish LRGs, the starting point of our analysis is the national GDP per 
capita, amounting to $54,000. We regard the local economy as diversified, with 
a healthy mix of manufacturing and service industries. The textile and 
clothing industry is longstanding in Borås, with some of the leading Nordic 
companies headquartered in the city. We consider the employment structure as 
stable, with no concentration of specific sectors or pronounced sensitivity to 
the economic cycle. By year-end 2018, unemployment in Borås was 7.1%, which is 
at par with the national level (7.0%), but slightly higher than the regional 
average (6.2%). 

After the elections last September, the composition of Borås' minority 
government shifted from left to center-left. However, we do not anticipate any 
significant changes, as there is a broad political consensus regarding 
long-term strategies for governing the city. In our view, Borås' management is 
committed to budgetary discipline, and has a track-record of conservative 
budgeting, controlling costs, and limiting deficits, although we have observed 
significantly higher expenses than budgeted related to the construction of the 
new biofuel plant, which we understand will be completed in 2019. 
 
 
Debt burden set to increase on the back of high investments 
 
We expect Borås' operating balance will remain stable throughout the forecast 
period, averaging 4.1% of operating revenues in 2019-2021, compared with 4.2% 
in 2018. We anticipate some pressure on the operating margin, caused primarily 
by demographic factors, although we expect management will be able to contain 
it. Similar to our assessment of other rated LRGs in Sweden, we consider 
Borås' expenditure structure as inflexible, and we believe it would be 
difficult to decrease operating spending without reducing important public 
services. 

Capital expenditures (capex) will remain high through 2021, primarily related 
to schools and care homes, and we forecast Borås' capex will average Swedish 
krona (SEK) 717 million (€67 million) annually, or 7.6% of total expenditures. 
Consequently, we forecast the deficit after capital accounts will average 2.6% 
in 2019-2021, compared with 1.5% in 2018. Borås usually benefits from 
unbudgeted asset gains, and we have included a conservative estimate of these 
revenues in our forecast. However, we acknowledge that if they are actually 
higher it would improve the deficit after capital accounts. 

We forecast the company sector's borrowing needs will decrease after 2019, 
thanks to the completion of the biofuel plant at Borås Energi och Miljö AB 
(BEMAB). As a result, we anticipate Borås' net onlending to its companies will 
average SEK600 million in 2020-2021, compared with SEK1.5 billion in 2018. In 
assessing Borås' debt burden, we use direct debt instead of our tax-supported 
debt metric, because we consider the tax-supported debt figure to be distorted 
by the companies' revenues. We expect Borås' direct debt will reach 125% of 
operating revenues by year-end 2021, compared with 96% in 2018. The city acts 
as an in-house bank, and has lent the totality of the debt to its companies, 
with the housing company, AB Bostäder i Borås, and BEMAB as the major 
borrowers. We consider the housing company to be self-supporting, which we see 
as a mitigating factor for Borås' debt burden. 

We consider the city's financial management as experienced and prudent. The 
financial policies in place are conservative and the treasury actively works 
to minimize financial risks. Borås funds itself primarily via the capital 
markets, through its SEK5 billion medium-term note program, and SEK2.5 billion 
commercial paper program. In addition, Borås borrows from the Swedish 
municipal funding vehicle Kommuninvest i Sverige AB (AAA/Stable/A-1+). 

In our assessment of Borås' contingent liabilities, we consider guarantees 
extended to subsidiaries and associations. We also include debt lent to the 
housing company, as we consider it a mitigant in our debt assessment, although 
we regard the recapitalization risk as very low thanks to the low business 
risk and the significant surplus values in the property portfolio. 
Furthermore, as a member of Swedish public sector funding agency, 
Kommuninvest, Borås has signed joint and several guarantees of Kommuninvest's 
obligations. Currently, we consider the risk that these guarantees would be 
called upon as low. 

We consider Borås' liquidity as strong, owing to a mix of own-source liquidity 
and committed facilities. We calculate that Borås' liquidity sources cover 
132% of the upcoming 12 months' debt service. In our assessment, our opinion 
is that Borås benefits from a strong, ready, and reliable access to external 
liquidity, similar to that of other LRGs in Sweden that we rate. However, we 
observe that the overall funding need in the company sector remains large and 
we factor this in our assessment of the city's liquidity position. Liquidity 
sources consist of cash, liquid assets, and our proxy for upcoming funding 
needs (represented by the balance after capital accounts less interest, 
divided by two), amounting to SEK535 million, after appropriate haircuts. We 
also include SEK2.5 billion of committed backup facilities and a SEK400 
million unused checking account. We calculate that Borås will service SEK2.6 
billion of maturing debt and interest over the coming 12 months. 

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.

Disclaimers: AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. All data and information is provided “as is” for personal informational purposes only, and is not intended for trading purposes or advice. Please consult your broker or financial representative to verify pricing before executing any trade.

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