TEXT-S&P revises Swiss Canton of Basel-Country outlook to negative
(The following statement was released by the rating agency)
Oct 10 - Overview
-- In our opinion, the Canton of Basel-Country risks budgetary deterioration and a weakening liquidity position, should it not succeed in implementing its proposed budgetary savings measures.
-- We are revising our outlook on Basel-Country to negative and affirming the 'AAA/A-1+' credit ratings on the canton.
-- The negative outlook reflects our view that there is a one-in-three likelihood that Basel-Country will not succeed in implementing its savings measures over the next two years.
On Oct. 10, 2012, Standard & Poor's Ratings Services revised its outlook on the Swiss Canton of Basel-Country to negative from stable. At the same time, the 'AAA' long-term and 'A-1+' short-term issuer credit ratings were affirmed.
We revised the outlook to negative following our assessment of Basel-Country's current and projected budgetary performance. We see a one-in-three chance that the canton might not succeed in stabilizing its liquidity position at a level commensurate with a 'AAA' rating. Such a development could occur if the management's budgetary savings measures fail to improve the budgetary performance significantly, which could also signal weaker effectiveness of the canton's financial management.
We affirmed the ratings because we think the canton currently displays very prudent management and has started to implement savings measures. Furthermore, Basel-Country has a very wealthy economic environment and operates in an institutional framework that we classify as "predictable and supportive". This assessment is also supported by the canton's history of sound budgetary performance, which should enable it to recover past strengths.
The ratings on Basel-Country reflect the canton's dynamic economy, which helps to make it one of the wealthiest regions in Western Europe, with a GDP per capita that reaches 148% of the EU-27 average. A further positive factor for the ratings on Basel-Country is Switzerland's supportive and predictable framework for its cantons.
The ratings also express our view of the canton's very prudent management, which has developed measures to structurally balance its accounts, in line with its conservative financial guidelines. We view this financial planning, as well as the example set out by the canton's deeply entrenched guidelines, as a key credit strength.
Aside from the currently weaker budgetary performance, the ratings also reflect the canton's low but increasing tax-supported debt burden.
While the canton overall theoretically has high budgetary flexibility, highlighted by more than 75% modifiable revenues, we believe that the canton is unlikely to increase taxes to counteract a further structural deterioration of its financial position, but rather would adjust spending.
The canton had free cash and liquid assets that amounted to Swiss franc (CHF) 391.5 million (about EUR326 million) as of year-end 2011. However, this sum is ever decreasing and as of Sept. 30, 2012, stood at CHF174 million, accounting for about 80% of debt service over the coming 12 months. Combined with its CHF50 million liquidity line, debt service is about 100% covered, which we view as a neutral position.
The ratings are further based on Standard & Poor's expectation that the canton will regain good budgetary results in the future, thanks to its currently very prudent management and proposed plans to reduce budgetary deficits. In 2011, Basel-Country posted an operating surplus of 2.2% of operating revenues, and a deficit after capital accounts of 10.0% of adjusted total revenues. While we expect sound results of 3.0% and minus 3.1%, respectively, for 2012, we also forecast another weaker year in 2013, with an only marginally positive operating budget and an increasing deficit after capital accounts of 8.7% of adjusted total revenues. Starting in 2014, our base-case scenario assumes that the canton will fully implement its budgetary savings measures and thus will once again display improving budgetary results.
Our base-case scenario assumes that debt will rise to over 60% of operating revenues by 2014, having doubled over the five years since 2010. This does not include the restructuring of the pension fund, an option the canton is currently evaluating. Taking into account the canton's unfunded pension liabilities, we expect its net financial liabilities to increase to 125.7% of operating revenues by 2014.
The short-term rating is 'A-1+'. We view Basel-County's current overall liquidity position as very positive, which includes the canton's access to external liquidity, even though the volume of its liquid assets has significantly reduced.
We regard the canton's access to external liquidity as strong, on the back of our assignment to Switzerland's banking sector of a BICRA score of '1', the best possible score (see "Banking Industry Country Risk Assessment: Switzerland", published April 11, 2012).
Furthermore, we reflect Basel-Country's close relationship with its cantonal bank, Basellandschaftliche Kantonalbank (AAA/Negative/A-1+), in our liquidity assessment.
The negative outlook reflects our view that there is a one-in-three likelihood that Basel-Country will not succeed in implementing its savings measures over the next two years. This would result not only in further deterioration of its budgetary performance, but could also lead to a deterioration of our assessment of the effectiveness of the canton's financial management. It might furthermore weigh on our assessment of Basel-Country's liquidity position, should the canton reduce its liquid assets sharply. The outlook expresses our opinion that the canton has little room to deviate from its consolidation measures.
We might revise the outlook to stable if the canton's management succeeds in reversing the trend of budgetary deterioration and returns to a structurally balanced budget in the medium term, with a solid positive operating performance.
Under our base-case scenario, we presume that Basel-Country can limit further debt increases beyond currently projected levels and should be able to retain a liquidity position comfortably at a volume sufficient to cover upcoming debt service.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Banking Industry Country Risk Assessment: Switzerland, April 11, 2012
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Methodology and Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 20, 2009
Ratings List CreditWatch/Outlook Action; Ratings Affirmed To From Basel-Country (Canton of) Issuer Credit Rating AAA/Negative/A-1+ AAA/Stable/A-1+ Senior Unsecured AAA AAA