Waimakariri District Council #AA/A-1+# Ratings Outlook Stable

Stocks and Financial Services Press Releases Thursday April 20, 2017 09:13
S&P Global Ratings--20 Apr--S&P Global Ratings
RATING ACTION

On April 20, 2017, S&P Global Rating's affirmed its 'AA' long-term foreigncurrency and local currency and 'A-1+' short-term issuer credit ratings onWaimakariri District Council, a New Zealand local government. The outlook onthe rating remains stable.

OUTLOOK

The stable outlook reflects our expectation that Waimakariri will maintain itstotal tax-supported debt below 180% of operating revenue, despite significantcapital spending, and maintain its sound liquidity coverage.

Downside scenario

We could lower the rating within the next two years if Waimakariri'safter-capital account deficits were to weaken significantly, resulting in asharp rise in its debt burden. This could occur if the council were tosignificantly boost its capital expenditure without offsetting adjustments torevenue or expenditure. This could also weaken its liquidity coverage and ourview of its financial management. Alternatively, we could lower our rating onWaimakariri if we lowered our rating on the New Zealand sovereign's foreigncurrency. We consider these scenarios to be unlikely during the next twoyears.

Upside scenario

Given that our ratings on Waimakariri are the same as the New Zealandsovereign foreign-currency rating, upward pressure on the rating is unlikelybecause we do not believe that a local council in New Zealand can withstand adefault scenario better than the sovereign. We could raise the rating in theunlikely event that we raised our rating on the sovereign rating andWaimakariri's budgetary performance and liquidity coverage improved.

RATIONALE

have updated and extended our forecasts for Waimakariri until 2019.Following this, we still expect the institutional settings and economicbackdrop in the district to support Waimakariri's credit profile. Managementis well poised to maintain the council's strong financial position in the face

of infrastructure spending that will lead to persistent deficits and newborrowing.

Institutional framework and financial management key credit strengths, whileeconomy is broadly supportiveThe institutional framework within which New Zealand local governments operateis a key strength supporting Waimakariri's credit profile. The centralgovernment (the Crown) provides significant support to the council, especiallyafter local infrastructure was damaged by a series of large earthquakes in2010 and 2011. The Crown covered 60% of the cost associated with the rebuild

of damaged infrastructure, with the council using insurance receipts,reserves, and borrowings to cover the remainder. Waimakariri has avoideddamage from recent earthquakes, including a major one that struck itsneighbor, Hurunui District Council, in November 2016.

Further, the New Zealand local government system promotes a strong managementculture, fiscal discipline, and high levels of financial disclosure amonglocal councils. This system allows Waimakariri to support higher debt levelsthan some of its international peers can tolerate at its current rating.

Waimakariri's financial management is experienced and conservative. Thecouncil is able to adopt budgets and long-term plans without delay, and itremains focused on being financially disciplined with its approach toborrowing and insurance policies. Debt and liquidity management policies areprudent, with no foreign-currency issuance and interest exposure is mostlyhedged. Its insurance policies cover above and underground assets in case ofnatural disaster, thereby limiting its contingent liabilities.

The economy is broadly supportive of Waimakariri's credit profile. It isbuoyed by robust population growth that has slowed from recent highs, thoughremains above the national average, and earthquake-related expenditure.Waimakariri's economy should perform reasonably well during the next year asdairy prices improve and new developments are built, including retail and aresidential "red zone" (i.e., a residential area that was damaged during the2011 earthquake). Economic growth waned in 2016, falling 0.4% from theprevious year as earthquake reconstruction activity peaked. Waimakariri hasenjoyed several years of strong economic growth; the district rebuilt afterthe 2010 and 2011 earthquakes recorded a GDP per capita averaging US$23,300between 2014 and 2016. In our view, GDP per capita could partially understatethe actual income level of Waimakariri's economy because a sizable proportionof its residents commute daily to Christchurch for work.

Deficits likely to remain high resulting in growing, but sustainable, debtlevels

We expect Waimakariri's after-capital account balance to remain in deficit ofabout 12.5% of total revenues between 2017 and 2019, reflecting weakeningoperating balances and the level of capital expenditure. We forecast thecouncil will spend between NZ$35 million and NZ$38 million per year on

infrastructure, which is equivalent to about 35% of total expenditure. Webelieve there is limited room to postpone capital works compared with ourforecasts because of ongoing spending pressures from earthquake repairs andstrong population growth. Our forecasts are between 25% and 35% below the

council's budget, and in line with its historical execution.

Lower operating grant revenue, combined with rising expenditure, will reduceoperating balances to about 12.7% of operating revenues in 2017 to 2019, downfrom 17% in 2016. Waimakariri's operating position is influenced by the timingof grants, which can result in balances approaching 20% of operating revenues.A couple of large capital projects caused after-capital account deficits toswell to 40% of total revenues in 2015.

Like all New Zealand local councils, there are no restrictions onWaimakariri's ability to increase property rates and user charges each year,other than a political imperative to keep increases low. These income streamsare the key source of income, making up about 90% of operating revenues, whichprovides significant budgetary flexibility. It is targeting average rateincreases of 3.8% in 2018.

Waimakariri will fund deficits and debt repayments with new borrowings ofNZ$15 million to NZ$20 million per year, which will result in its totaltax-supported debt reaching about 160% of operating revenues in 2019, up from128% in 2016. Interest expenses reflect this increased borrowing and will also

rise to 7.1% of operating revenues between 2017 and 2019, from less than 5%.Because of its location, Waimakariri maintains headroom between currentborrowings and their internal limits in case of emergencies such asearthquakes.

Waimakariri's liquidity coverage should remain high. We forecast cash and bankfacilities to average NZ$22 million during the next 12 months, covering about138% of Waimakariri's debt service. Waimakariri only has one short-term note,valued at NZ$10 million due in the next 12 months. Its next long-term bond ofNZ$5 million is due in August 2018.


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