Marlborough District Council Ratings Affirmed at #AA/A-1+#; Outlook Remains Stable

Stocks and Financial Services Press Releases Monday May 28, 2018 09:08
S&P Global Ratings--28 May--S&P Global Ratings
OVERVIEW
  • Marlborough District Council (Marlborough)'s long-term plan calls for higher levels of capital expenditure during the next few years. We expect Marlborough to record modest after-capital deficits through the forecast period, though its debt burden will remain moderate compared with domestic peers.
  • Marlborough's robust financial management, high level of fiscal flexibility, and New Zealand's excellent institutional settings continue to underpin its ratings.
  • We are affirming our 'AA' long-term and 'A-1+' short-term ratings on Marlborough.
  • The outlook on the long-term ratings is stable.
RATING ACTION

On May 28, 2018, S&P Global Ratings affirmed its 'AA' long-term foreign-currency and local-currency and 'A-1+' short-term issuer credit ratings on Marlborough District Council, a New Zealand local government. The outlook on the long-term ratings is stable.

OUTLOOK

The stable outlook reflects our expectation that the ratings on the sovereign will continue to constrain the ratings on Marlborough. We see only a low likelihood that the council's stand-alone credit profile will deteriorate substantially.

Downside scenario

With a stand-alone credit profile stronger than the foreign-currency rating on the New Zealand sovereign, it would take a substantial deterioration in Marlborough's credit metrics to warrant lower ratings. We could lower our ratings on Marlborough if its after-capital deficits widened significantly and over a longer timeframe than we currently forecast, resulting in a sharp rise in debt. Such developments might also cause us to reappraise our view of Marlborough's financial management. Alternatively, we would lower our ratings on Marlborough if we lowered our foreign-currency rating on the sovereign.

Upside scenario

The council's stand-alone credit profile is currently stronger than our foreign-currency rating on the sovereign. If we were to raise our ratings on the sovereign, then we would likely raise our ratings on Marlborough, all else being equal.

RATIONALE

We have updated and extended our forecasts for Marlborough through FY2019-20. We expect capital expenditure levels during the forecast period to be larger than they have been in past years, leading to modest after-capital deficits. Marlborough's liquidity metrics, while still strong, are weaker than we previously assessed because of some short-term borrowing to fund its subsidiaries. We still expect Marlborough's robust financial management, moderate debt burden relative to peers, and New Zealand's excellent institutional settings to support its credit profile.

--Robust financial management and New Zealand's excellent institutional framework support Marlborough's creditworthiness--

Marlborough's fiscal processes are credible and well established, with the council preparing long-term plans every three years, annual plans in the intervening years, and audited annual reports, in line with New Zealand requirements. The council's treasury management policies set prudent limits on external borrowing and interest rate risk, and all borrowing is in local currency. Like all New Zealand councils, Marlborough is governed by an elected group of councilors, led by a mayor. The councilors delegate day-to-day management to a full-time chief executive. The council owns 100% of Marlborough District Council Holdings Ltd. (MDCHL), which in turn is the sole owner of Port Marlborough New Zealand Ltd. and Marlborough Airport Ltd. Our analysis is based on the consolidated financials of the entire group.

We expect Marlborough's local economy to continue to perform soundly. The district had an average GDP per capita of about US$42,100 during 2015-2017, according to figures from New Zealand's Ministry of Business, Innovation and Employment. This is high by international standards and on par with New Zealand's three-year average of about US$42,000. Marlborough produces about 80% of New Zealand's total wine output, and its economy is somewhat concentrated in agriculture, viticulture, and associated manufacturing industries. This exposes the district to greater risk of economic volatility, in our view. Visitor spending has been subdued during the past year as a result of damage from the Kaikoura earthquake of November 2016, though we expect it to recover now that the main highway has reopened. Marlborough's population was about 46,200 in 2017. The district has the highest proportion of elderly people in New Zealand, with about 23% of the local population aged over 65.

The institutional framework within which New Zealand local governments operate is a key factor supporting Marlborough's credit profile. We believe this framework is one of the strongest and most predictable globally. It promotes a robust management culture, fiscal discipline, and high levels of transparency and disclosure.

--We expect capital spending to be higher and liquidity weaker; moderate debt burden underpins strong credit profile--

Like all New Zealand councils, Marlborough is currently in the process of preparing a triennial long-term plan that will set out its priorities in fiscal years 2019 (i.e., the year ending June 30, 2019) to 2029. The draft long-term plan calls for higher capital spending over the next few years, in part to comply with new national standards for water supply and improve resilience to natural hazards. We also expect higher capital expenditure at the group level, particularly as Port Marlborough begins work on an extension of the Waikawa Marina in 2019. Revenue from rates and council fees and charges meanwhile should grow at a moderate pace during the next 10 years. As a result, we expect Marlborough to record a small after-capital deficit this year and next. We expect operating surpluses to remain solid, averaging about 24% during the period 2016-2020. Marlborough's budgetary position is buoyed by asset sales, including the ongoing sale of sections at its Boulevard Park on Taylor subdivision, and the expected sale of the old Civic Theatre building for around NZ$10.8 million in fiscal 2019.

We expect Marlborough's total tax-supported debt as a proportion of consolidated operating revenue to grow to 84% by the end of fiscal 2020, up from 63% at the end of fiscal 2017, because some of the capital works program will be funded by new borrowing. This debt burden is moderate compared with many of Marlborough's domestic peers. Our financial metrics incorporate all of the group's revenues and expenses, and our debt metrics include all of its borrowings, including funds that are borrowed by the council and on-lent to MDCHL and its subsidiaries. Similar to many of its peers, Marlborough typically under-delivers on its capital plans each year. As such, our base-case forecasts incorporate a 20% haircut to budgeted capital expenditure.

Our ratings on Marlborough continue to be supported by the group's high level of fiscal flexibility. We estimate that about 71% of Marlborough's operating revenues are modifiable, which means they can be raised or lowered at the council's discretion. We do not count revenues from MDCHL and its subsidiaries as modifiable because we believe these revenue streams are more susceptible to market forces than the council's more stable sources of income, such as property rates.

We expect Marlborough's debt servicing needs during the next 12 months to comprise NZ$17.4 million of commercial paper (which is regularly rolled over), a Local Government Funding Agency (LGFA) bond of NZ$4 million maturing in March 2019, and around NZ$5.1 million in interest payments. We also expect the council to maintain an average of about NZ$10.5 million in cash and term deposits and NZ$2.9 million in investment-grade bonds. In addition, the group has access to NZ$30 million in undrawn commercial bank facilities with Westpac Banking Corp. and ASB Bank Ltd. As a result, we estimate that Marlborough's free cash, liquid assets (after standard S&P haircuts), and available committed bank lines stand at about 161% of the next 12 months' debt service. Our assessment of Marlborough's debt service coverage is weaker than it was last year. Nevertheless, Marlborough's internal liquidity is better than many of its peers' because it maintains a higher level of cash reserves, which it can use to meet short-term expenses in the event of a natural disaster.

We consider Marlborough's access to external liquidity to be satisfactory. While New Zealand's capital markets are comparatively liquid, they lack depth because of their relatively small size. During the severe market dislocation of 2008 and 2009, some New Zealand councils had difficulty issuing unrated commercial paper. Similar to most of its domestic rated peers, Marlborough sources the majority of its external debt through New Zealand's LGFA.

Marlborough's quantifiable contingent liabilities are small. The council has provided financial guarantees of loans to community organizations totaling NZ$2.9 million as of June 30, 2017. Marlborough lies within the highest earthquake risk zone in New Zealand, and the district sits on a series of fault lines. Insurance coverage is adequate, with most above-ground assets insured commercially and underground assets insured through a cost-sharing arrangement between the Local Authority Protection Programme and the central government. Marlborough is one of 31 shareholders and 15 joint guarantors of the LGFA's borrowings. We consider it very unlikely that this guarantee will be activated in the near future.


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