Norwegian Municipality of Stavanger Affirmed At 'AA+/A-1+'; Outlook Stable


  • In 2020, Stavanger will merge with two smaller municipalities, Rennesöy and Finnöy, nearly doubling its geographical area, although the population increase will be limited.
  • We expect Stavanger's management will adhere to strict budget discipline, mitigating risks associated with exposure to the petroleum sector and uncertainties related to the upcoming merger.
  • Stavanger's prudent debt and liquidity management, ample asset holding, and long average debt maturity profile continue to support its strong liquidity.
  • We are affirming our 'AA+/A-1+' ratings on Stavanger.
  • The outlook remains stable.

Rating Action

On May 17, 2019, S&P Global Ratings affirmed its 'AA+/A-1+' long- and short-term issuer credit ratings on the Norwegian municipality of Stavanger. The outlook remains stable.

Outlook

The stable outlook reflects our expectation that, over the next 24 months, Stavanger's efforts to contain operating expenditure will enable it to maintain a strong budgetary performance, thereby limiting debt accumulation. We also expect Stavanger will continue its prudent debt and liquidity management, with its current liquidity position remaining strong in relation to upcoming needs.
Downside Scenario
The ratings could come under pressure if we observed increasing cost pressure after the merger that is not sufficiently off-set by higher revenues and expenditure efficiency measures, leading to a marked deterioration in budgetary performance. This, together with a loosening of liquidity management, resulting in a significantly lower liquidity coverage ratio, could lead to a downward revision of our assessment of Stavanger's financial management, and a downgrade.
Upside Scenario
We could raise the ratings if we observed a track record of political and managerial strength within the new municipal structure, and a consistent commitment to internal debt and liquidity polies, leading us to improve our assessment of the municipality's financial management. We could also raise the rating if we saw a structural improvement in balance after capital accounts, reducing the need to finance investments with debt, and markedly reducing indebtedness.

Rationale

In our view, the risks to the ratings are balanced. On the back of Norway's very supportive institutional framework, a wealthy local economy, and strong financial management, we expect Stavanger will maintain its sound budgetary performance, its very healthy liquidity position, and contain debt accumulation. These factors mitigate risks stemming from a relatively high debt burden, increasing contingent liabilities in the form of guarantees to related companies, and uncertainties associated with the upcoming merger with two smaller municipalities in 2020.
A very strong institutional framework and competent financial management remain key strengths
The Norwegian institutional framework for local and regional governments (LRGs) is extremely predictable and supportive, in our view, and it is a key factor underpinning our rating on Stavanger. Thanks to very strong system support, Norwegian LRGs show a high degree of institutional stability and there are mechanisms in place to ensure that the LRGs do not come under financial distress.
Stavanger is Norway's fourth-largest municipality and in a global comparison its economy is very wealthy. Although the city is the center of Norway's oil-and-gas-related industry, it has a fairly diversified employment sector, with the public sector playing a dominant role. Stavanger is the regional center and the administrative hub of southwestern Norway and, in addition to offering jobs in public administration, also has a university and a regional hospital. Wages in Stavanger are high, and we estimate that local GDP per capita exceeds Norway's GDP per capita. However, because the Norwegian equalization system significantly balances wealth levels among LRGs, we use Norway's national GDP per capita of $76,500 as the starting point for our analysis of Stavanger's economy.
We view Stavanger's financial management as prudent and competent, with a track record of enforcing budgetary discipline through cost controls. We also observe a history of broad consensus across the political spectrum on key policy areas, and understand that there is agreement on financial policies across management in Stavanger, Rennesöy, and Finnsöy. Therefore, we expect revenue and expenditure management will remain prudent beyond the 2019 elections and 2020 merger. The in-house treasury management has strong expertise in capital markets, with good monitoring mechanisms. We expect this will continue within the new municipal structure.
Strong operating surplus curtails borrowing needs for investments and contributes to healthy liquidity coverage
Stavanger's revenue flexibility is limited because the central government sets transfers and upper limits for personal income taxes. Consequently, Stavanger's only flexibility in terms of taxes is to increase property taxes within set limits, which could enhance revenues by more than Norwegian krona (NOK) 100 million. Furthermore, Stavanger has sizeable assets, primarily in terms of an equity holding in an energy company, with significant surplus values that could be used to raise additional capital revenues. Stavanger also has some leeway to cut operating expenditures, given the already high standard of its services. We note that this flexibility has been an important factor in maintaining strong operating performance in the past, especially in times of oil price volatility and financial crisis.
In 2020, Stavanger will merge with the two smaller municipalities of Rennesöy and Finnöy as part of a wider Norwegian municipal reform. The municipality will nearly double in size, but the population will only increase by about 6%. Although we expect revenue will rise, increased demand for municipal services will also bring greater cost pressures. However, we expect management will remain committed to budgetary discipline and the city's ongoing efficiencies to broadly counterbalance the resulting cost pressures such that the operating balance remains above 5% of operating revenues on average over 2019-2021. A strong operating performance helps contain deficits after capital accounts in a period of high investment.
Albeit declining in 2018 from the previous year's record levels, Stavanger's investments remain high at 10% of total spending. We expect investments will remain elevated to accommodate for a growing population and changing demographics, with investments primarily directed to maintaining educational facilities, and building new schools and care facilities. As such, we project Stavanger will post deficits after capital expenditure at an average of 2.1% of total revenues over our forecast horizon.
Consequently, we forecast additional net new borrowings and expect Stavanger's tax-supported debt will rise to 90.8% of consolidated operating revenues by year-end 2021, from 83.6% in 2018. In our calculation of tax-supported debt, we include debt onlent to municipal companies, loans to households via state-owned bank Husbanken, and guarantees to government-related companies that we assess as non-self-supporting.
In evaluating the city's contingent liabilities, we include guarantees to self-supporting toll-road company Ryfast. We note that the guarantees' exposure to the toll-road company has increased in recent years, causing us to revise our assessment of Stavanger's overall contingent liabilities. We consider the toll road company will be self-supporting because its revenue generation depends on stable toll road income, it has no maintenance responsibilities, and it operates in a low-risk industry. The toll-road company has the flexibility to raise tolls, dampening company risk. Furthermore, Stavanger's stakes in several limited liability companies constitute a pool of reserves, while its stake in energy company Lyse brings in substantial dividend revenue.

Stavanger has prudent liquidity management strategies, which ensure that ample levels of cash are readily available. This, together with reduced need for short-term commercial paper debt and the long average maturity of its debt portfolio, have helped the city achieve a very strong liquidity position. In addition to cash, the city has NOK500 million in a committed credit facility and a long-term liquidity portfolio primarily invested in Norwegian bonds and listed equities, which we include in our liquidity assessment. As a result, Stavanger's cash, liquid assets, and available committed credit facilities cover about 158% of debt service and funding needs over the next 12 months. Net free cash and liquid assets cover about 125% of the same. This is somewhat lower than the respective 219% and 165% of six months ago, due to the larger volume of maturing debt coming due in the 12 month period. However, we anticipate that, based on the current debt maturity profile and liquidity levels, this decrease will be temporary and expect the liquidity position will remain healthy.
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