Region of Stockholm Ratings Affirmed At 'AA+/A-1+' And 'K-1'; Outlook Stable

  • We believe that Region of Stockholm (formerly Stockholm County Council) will continue to post strong operating balances and somewhat reduced investment levels through 2021, leading to smaller deficits after capital expenditure.
  • We now expect the region's tax-supported debt will peak at 65% of revenues this year before gradually descending thereafter.
  • We are therefore affirming our 'AA+/A-1+' global scale and 'K-1' regional scale ratings on Region of Stockholm.
  • The outlook remains stable.
RATING ACTION
On April 5, 2019, S&P Global Ratings affirmed its 'AA+' long-term and 'A-1+' 
short-term global scale issuer credit ratings on Sweden's Region of Stockholm. 
The outlook is stable.

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


OUTLOOK
We anticipate that Region of Stockholm will improve its performance metrics in 
2019-2021 on the back of sustained healthy operating surpluses and narrower 
deficits after capital expenditure. In our base-case scenario for 2019-2021, 
the region's tax-supported debt will gradually trend down, and we anticipate 
continued prudent liquidity management, with liquidity remaining exceptionally 
strong.

Downside scenario
The ratings could come under pressure if the region's budgetary performance 
were worse than we currently expect, leading to deficits after capital 
expenditure at a structural level of more than 5% of operating revenues. If, 
together with this, we noted deterioration in the region's liquidity, with 
cash and committed back-up facilities structurally covering less than 80% of 
debt service, we could negatively reassess both the region's financial 
management and liquidity and lower the ratings.

Upside scenario
We could raise the ratings if we considered that both the region's financial 
management and debt burden had strengthened. The latter would most likely be 
due to structural improvements in tax-supported debt to below 60% of revenue.


RATIONALE
In our view, Region of Stockholm's budgetary performance will gradually 
improve through 2021, supported by strong operating surpluses following 
peaking investments over the past few years. The region's liquidity, financial 
management, and contingent liabilities are other rating strengths, and they 
somewhat offset the region's high debt burden and rigid expenditure structure. 
In line with our view of other Swedish local and regional governments (LRGs), 
we consider the institutional framework as credit supportive.


Favorable local economy structure and institutional support to LRGs

Region of Stockholm's economy is well balanced and has a diverse industry 
structure, signaling its importance as a national and regional growth center. 
However, owing to the comprehensive equalization system within the Swedish 
institutional framework, which evens out wealth levels among LRGs, we use the 
national GDP per capita of $53,000 as the starting point of our analysis. 
Population growth in the region is strong, averaging 1.65% over the past three 
years, compared with the national average of 1.2%. Furthermore, at 6.0% in 
February 2019, unemployment is marginally lower than the national average of 
6.3%.

Although Region of Stockholm is a net contributor to the Swedish LRG 
equalization system, we consider the institutional framework extremely 
predictable and supportive to the whole sector, and a key component of our 
ratings on the region. In our view, the system displays a high degree of 
institutional stability and the sector has good means for strong revenue and 
expenditure balance given the far-reaching equalization system and LRGs' 
autonomy in setting their local or regional tax rates.

We no longer view the region's revenue flexibility as a credit positive. This 
is because the regional tax rate is high in a national comparison and, even if 
ticket prices in its public transportation company are comparably low, the 
past few years' price increases have somewhat diluted the transport company's 
leeway for future large-scale increases, considering both political aspects 
and residents' willingness to accept higher prices. 

We note that the region has some legacy management-related issues that could 
have spillover effects, such as in financial leases and the public-private 
project to develop, build, operate, maintain, and finance New Karolinska Solna 
University Hospital. Despite this, we believe that the region's financial 
management is competent. We expect it will use its revenue flexibility to 
counteract any potential budgetary pressure.


Investment levels should inch down, enabling improvement of the balance after 
capital accounts

Even though the region's increasing population adds to its operating 
expenditure, the region has a track record of robust budgetary performance, 
with operating balances averaging 8.9% of operating revenue in 2016-2018. This 
was partly thanks to a strong increase in tax revenue as well as ticket sales 
in its public transportation company. We continue to anticipate continued 
strong tax revenue growth in 2019. However, we expect that budgetary 
challenges will remain, notably due to structural deficits at several of the 
region's hospitals and increased contributions to the Swedish LRG equalization 
system, which we project will reduce the region's operating balance slightly 
to an average 7.6% of operating revenue during 2019-2021. Even if some of the 
regional hospitals continue to struggle with weak budget adherence, we still 
factor into our base case that the region will narrow the deficits at some of 
these hospitals and contain the growth of operating expenditure by gradually 
improving its budgetary steering.

Moreover, we project that Region of Stockholm's capital expenditure will 
remain high, peaking in 2019 before gradually declining. Our forecasts for the 
region's investments largely relate to property equipment upgrades, new 
hospital buildings, and investments in public transportation. We expect 
investments will average a high 11.7% of total expenditure over 2019-2021, 
noting, however, that this is lower than the 12.9% average observed over 
2017-2018. This gradual descent translates to an average deficit after capital 
accounts of about 4.4% of revenues for the 2019-2021, versus 4.8% over 
2016-2018. Also, we expect deficits after capital expenditure to continue 
narrowing. 

On the back of this expected improvement in the balance after capital 
accounts, we expect the region to gradually decrease its tax-supported debt. 
Consequently, we project the region's tax-supported debt will decrease to 
60.3% of consolidated revenue by 2021 from 64.4% in 2018. In our calculation 
of tax-supported debt we include financial leases and an estimate of the 
present value of capital and funding costs from the public-private partnership 
agreement for New Karolinska Hospital.

We assess Region of Stockholm on a consolidated basis, including transport 
company AB Storstockholms Lokaltrafik. As such, the company's liabilities and 
performance are included in our debt and budgetary performance analyses. This 
leads us to assume that the major contingent liability the region is facing is 
the potential future losses and recapitalization that could arise in relation 
to ongoing financial leases, which we view as overall contained.

Region of Stockholm enjoys exceptionally strong liquidity, in our opinion, 
reflecting its reliable access to external liquidity and funding in the coming 
years, as well as its comprehensive committed bank facilities. In February 
2019, cash and committed facilities accounted for 225% of debt service for the 
ensuing 12 months, and we expect cash balances will average Swedish krona 
(SEK) 1 billion (about €90.6 million) over the next 12 months. We also take 
into account a committed bank line of SEK4 billion and a checking account 
containing SEK3 billion. Furthermore, the region has loan agreements with the 
European Investment Bank (EIB) linked to specific infrastructure investment 
plans. We include as a liquidity source SEK3.5 billion available under the EIB 
loans. 

Region of Stockholm has a range of funding alternatives, which reduces 
refinancing risk. Funding is largely acquired through a €4 billion euro 
medium-term note program. The region also has a SEK5 billion commercial paper 
program. Overall, we consider the region's debt management prudent and our 
base-case assumption is that the region will maintain the long-term nature of 
its loan portfolio and that its liquidity will remain exceptionally strong 
over 2019-2021.

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