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

  • Following elections in September 2018, the City of Västerås' new majority administration has a slightly different formation, but we do not anticipate any major changes to financial policies.
  • We expect management will remain committed to budgetary discipline and counteract pressure on its financial position, despite demographics-related expenditure pressure and high investments.
  • We are affirming our 'AAA/A-1+' and 'K-1' ratings on Västerås.
  • The stable outlook reflects our view that the city's prudent financial management and ample liquidity buffers will counterbalance any risks arising from temporarily heightened investment spending needs and structural demographic pressure.
On March 15, 2019, S&P Global Ratings affirmed its 'AAA' long-term and 'A-1+' 
short-term foreign and local currency issuer credit ratings on the Swedish 
City of Västerås. The outlook remains stable. 

We also affirmed our 'K-1' short-term Nordic regional scale rating on 

The stable outlook reflects our base-case expectation that Västerås' financial 
management will continue its prudent approach to managing expenditures over 
the next two years and maintain its ample liquidity buffers. In our base case, 
we also assume that the city will prudently manage its ongoing investment 
program, and that of its municipal companies, resulting in somewhat higher 
debt. That said, we expect the increase will primarily constitute onlending to 
the city's creditworthy housing and energy companies.

Downside scenario

We could take a negative rating action if the city's operating balance is put 
under pressure, or higher-than-expected levels of investments result in 
capital expenditure (capex) deficits sustainably below 5%. We could lower our 
assessment of Västerås' financial management if management proved unable to 
resolve these scenarios by increasing revenues and/or reducing operating 
expenditures, therefore demonstrating its weakened political and managerial 
strength and revenue and expenditure management. 

The affirmation reflects our assumption that Västerås' liquidity position and 
budgetary performance will remain stable and broadly in line with its 
financial targets, despite increased expenditures and investment needs 
stemming from the city's changing demography. Management's prudent approach 
and the city's ample revenue flexibility will remain central to our base case. 
Additionally, although we believe that debt-funded investments will result in 
somewhat higher debt in nominal terms, we now think Västerås' debt could start 
decreasing toward the end of our forecast period through 2021.

The new majority administration will focus on improvement in core services

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, because the system has a high degree 
of institutional stability, and revenue and expenditure management based on a 
far-reaching equalization system and local tax setting autonomy.

The election in September 2018 led to a new government, now comprising a 
majority coalition between the Social democrats, Green party, Centre party, 
and the Liberal party, which joined the ruling coalition instead of the 
Christian democrats. However, we do not anticipate any significant changes, as 
there is a broad political consensus on long-term strategies for governing the 

We believe Västerås will continue its track record of prudent and 
sophisticated management of budgetary performance, debt, and liquidity. 
Budgeting procedures show a high degree of transparency, and formal rules 
stipulate processes and levels of financial disclosure. On balance, we 
consider Västerås' financial management as competent and prudent, displaying 
effective cost control and sound debt and liquidity management. In 2019 we 
expect rising capex will heighten the city's funding needs, but consider its 
debt management able to contain risk and ensure strong ongoing liquidity. With 
budgetary challenges to both the operating and capital accounts, we still 
believe the city would use its revenue flexibilities if necessary to achieve 
balanced budgets. Given our understanding that Västerås' new government will 
provide for a high degree of policy continuity, we do not expect major 
financial policy shifts in the medium term. 

Västerås' local economy is strong in a global comparison, with a diverse 
industry structure that focuses on high-tech engineering, resulting in income 
levels above the national average. Nevertheless, a strong inflow of 
job-seekers from surrounding areas and immigration have led to somewhat higher 
structural unemployment than the national average. Västerås also benefits from 
its close proximity to, for example, the cities of Stockholm and Uppsala, and 
Stockholm International Airport. 

The city benefits from stable budgetary performance, slower debt accumulation, 
and continued robust liquidity

Thanks to robust economic fundamentals and prudent financial management, 
Västerås has posted a consistently average budgetary performance over recent 
years, counterbalancing increasing cost pressure stemming from its changing 
demography. For 2018, Västerås posted a stronger-than-targeted budgetary 
performance, achieving a surplus of Swedish krona (SEK) 344 million (or $37 
million), which is SEK194 million above budget. The surplus is boosted by some 
extraordinary gains from asset sales and sizable revenues from selling land 

We expect Västerås' operating balance will remain stable throughout the 
forecast period, averaging 4.3% of operating revenues in 2019-2021, broadly in 
line with our previous review. Going forward we anticipate some pressure on 
operating expenditures, caused primarily by demographic factors, although we 
expect management will apply strict cost controls to manage this pressure. 
Similar to our assessment of other rated LRGs in Sweden, we consider Västerås' 
expenditure structure as inflexible, and we believe it would be difficult to 
decrease operating spending without compromising important public services. 
Due to sustained investments, we expect Västerås will demonstrate a modest 
deficit after capital accounts of 2.3% of revenues on average in 2019-2021.

In our view, Västerås has the revenue flexibility to mitigate almost any 
significant budgetary deterioration, which is important in light of our 
assessment of the municipality's somewhat rigid expenditure structure. The 
municipality's comparably strong per-capita tax base means that it has a 
rather high share of modifiable revenues. Even though this share has reduced 
somewhat since our last review, Västerås' flexibility in generating revenues 
in other areas, such as via potential asset sales, counterbalances this 
constraint. In addition, Västerås' municipal tax rate is below the national 
and county averages, which further boosts its income-generation capacity.

We acknowledge that the lion's share of Västerås' group investments is 
delivered by its company sector, in particular by energy utility Mälarenergi 
and public housing company Bostads AB Mimer, which are both undergoing 
considerable expansion. We continue to expect that the municipal companies' 
investments will require additional loan funding, which will come via further 
onlending from the city treasury. However, we forecast the company sector's 
borrowing needs will decrease after 2020, thanks to the completion of the CHP 
Plant at Mälarenergi. As a result, we anticipate Västerås' net onlending to 
its companies will average SEK821 million in 2020-2021, compared with SEK1.3 
billion in 2018. In assessing Västerås' debt burden, we consider direct debt 
instead of tax-supported debt, because we consider the tax-supported debt 
ratio distorted by the high influx of companies' revenues. We expect Västerås' 
direct debt will reach 122% of operating revenues by year-end 2021, slightly 
reduced compared with our previous forecast. The city acts as an in-house 
bank, and has onlent all its loan debt to its companies.

In assessing Västerås' debt, we regard as positive that the city has no loans 
for its core municipal activities and that the debt held in the city treasury 
is onlent to municipal companies. Additionally, most companies are financially 
sound, in particular Mimer, enhancing our assessment of Västerås' debt burden.

We consider Västerås' contingent liabilities to be limited. Most of the 
municipal companies' debt is factored into our assessment of the city's debt 
burden because all of these companies receive loan funding from the city 
treasury. With regard to Mimer, for which the onlending has a positive impact 
on our assessment of debt burden, recapitalization risk is minimal. This is 
because cash-flow risk is low, due to very low demand risk and a strong means 
of passing costs on to tenants. Furthermore, risks to Västerås' balance sheet 
are mitigated by Mimer's ample surplus values. External guarantees, issued by 
Västerås, are minimal and none have been called over the past several years. 
Västerås is not a member of public-sector funding agency Kommuninvest, and 
therefore has no contingent risk stemming from Kommuninvest's joint and 
several guarantee structure.

Västerås' liquidity position reflects its strong debt-service coverage. In 
March 2019, cash and committed facilities accounted for about 148% of debt 
service for the ensuing 12 months. We believe Västerås benefits from a strong, 
ready, and reliable access to external liquidity, similar to that of other 
LRGs in Sweden that we rate. Using our base-case estimates, the city's average 
cash and security investments totaled about SEK3.19 billion and average 
committed facilities and available checking accounts about SEK2.55 billion. We 
calculate that Västerås will service SEK3.15 billion of maturing debt and 
interest over the coming 12 months.
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