(The following statement was released by the rating agency)
Oct 10 - Overview
-- In our opinion, the Canton of Basel-Country risks budgetarydeterioration and a weakening liquidity position, should it not succeed inimplementing its proposed budgetary savings measures.
-- We are revising our outlook on Basel-Country to negative and affirmingthe 'AAA/A-1+' credit ratings on the canton.
-- The negative outlook reflects our view that there is a one-in-threelikelihood that Basel-Country will not succeed in implementing its savingsmeasures over the next two years.
On Oct. 10, 2012, Standard & Poor's Ratings Services revised its outlook onthe 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'scurrent and projected budgetary performance. We see a one-in-three chance thatthe canton might not succeed in stabilizing its liquidity position at a levelcommensurate with a 'AAA' rating. Such a development could occur if themanagement's budgetary savings measures fail to improve the budgetaryperformance significantly, which could also signal weaker effectiveness of thecanton's financial management.
We affirmed the ratings because we think the canton currently displays veryprudent management and has started to implement savings measures. Furthermore,Basel-Country has a very wealthy economic environment and operates in aninstitutional framework that we classify as "predictable and supportive". Thisassessment is also supported by the canton's history of sound budgetaryperformance, which should enable it to recover past strengths.
The ratings on Basel-Country reflect the canton's dynamic economy, which helpsto make it one of the wealthiest regions in Western Europe, with a GDP percapita that reaches 148% of the EU-27 average. A further positive factor forthe ratings on Basel-Country is Switzerland's supportive and predictableframework 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 linewith 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 alsoreflect 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 cantonis unlikely to increase taxes to counteract a further structural deteriorationof 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 isever decreasing and as of Sept. 30, 2012, stood at CHF174 million, accountingfor about 80% of debt service over the coming 12 months. Combined with itsCHF50 million liquidity line, debt service is about 100% covered, which weview as a neutral position.
The ratings are further based on Standard & Poor's expectation that the cantonwill regain good budgetary results in the future, thanks to its currently veryprudent management and proposed plans to reduce budgetary deficits. In 2011,Basel-Country posted an operating surplus of 2.2% of operating revenues, and adeficit after capital accounts of 10.0% of adjusted total revenues. While weexpect sound results of 3.0% and minus 3.1%, respectively, for 2012, we alsoforecast another weaker year in 2013, with an only marginally positiveoperating budget and an increasing deficit after capital accounts of 8.7% ofadjusted total revenues. Starting in 2014, our base-case scenario assumes thatthe canton will fully implement its budgetary savings measures and thus willonce again display improving budgetary results.
Our base-case scenario assumes that debt will rise to over 60% of operatingrevenues by 2014, having doubled over the five years since 2010. This does notinclude the restructuring of the pension fund, an option the canton iscurrently evaluating. Taking into account the canton's unfunded pensionliabilities, we expect its net financial liabilities to increase to 125.7% ofoperating revenues by 2014.
The short-term rating is 'A-1+'. We view Basel-County's current overallliquidity position as very positive, which includes the canton's access toexternal liquidity, even though the volume of its liquid assets hassignificantly reduced.
We regard the canton's access to external liquidity as strong, on the back ofour assignment to Switzerland's banking sector of a BICRA score of '1', thebest possible score (see "Banking Industry Country Risk Assessment:Switzerland", published April 11, 2012).
Furthermore, we reflect Basel-Country's close relationship with its cantonalbank, Basellandschaftliche Kantonalbank (AAA/Negative/A-1+), in our liquidityassessment.
The negative outlook reflects our view that there is a one-in-three likelihoodthat Basel-Country will not succeed in implementing its savings measures overthe next two years. This would result not only in further deterioration of itsbudgetary performance, but could also lead to a deterioration of ourassessment of the effectiveness of the canton's financial management. It mightfurthermore weigh on our assessment of Basel-Country's liquidity position,should the canton reduce its liquid assets sharply. The outlook expresses ouropinion that the canton has little room to deviate from its consolidationmeasures.
We might revise the outlook to stable if the canton's management succeeds inreversing the trend of budgetary deterioration and returns to a structurallybalanced budget in the medium term, with a solid positive operatingperformance.
Under our base-case scenario, we presume that Basel-Country can limit furtherdebt increases beyond currently projected levels and should be able to retaina liquidity position comfortably at a volume sufficient to cover upcoming debtservice.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global CreditPortal, 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 TheirCommercial 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