(The following was released by the rating agency)
-- We believe Kapiti's large capital program, along withlower revenue projections in its latest Long-Term Plan, willlead to a higher ratio of tax-supported debt than previouslyexpected. We also anticipate a period of high deficits aftercapital spending.
-- The ratings continue to be supported by the very stronginstitutional framework.
-- We are lowering our long-term rating on Kapiti CoastDistrict Council to 'A+' from 'AA-' and short-term rating to'A-1' from 'A-1+'.
-- The stable outlook reflects our expectation that thecouncil's debt will peak at 237% of revenue in fiscal 2014, andthereafter stay below 230%.
On Oct. 11, 2012, Standard & Poor's Ratings Services loweredits long-term issuer credit rating on Kapiti Coast DistrictCouncil (KCDC) to 'A+' from 'AA-'. Consequently, we lowered theshort-term rating on KCDC to 'A-1' from 'A-1+'. The outlook isstable.
The downgrade on KCDC reflects our view that the largercapital program outlined in its recently released Long-Term Plan(LTP) will lead to a worsening of its financial ratios.
Although the capital projects in the new LTP are largelyunchanged from the previous LTP, we believe the council'sdecision to accelerate a number of big-scale projects will leadto an earlier-than-expected increase in its net borrowing in thecurrent year until the fiscal year ending June 2016. Lowerrevenues over the forecast period in the LTP are also projecteddue to a weaker economic environment and slower growth in therate base. As a result, we project the tax-supported debt torise to 237% of revenue by fiscal 2014. This breaches the 190%threshold that we had specified in our previous outlookstatement.
Likewise, we expect the large capital program to furtherweaken the council's budgetary performance. In fiscal 2012, thecouncil's deficit after capital expenditure reached 33.5% ofrevenue. Over the next two fiscal years, we forecast the deficitto be in the range of 24% to 55% of revenue. We previouslyexpected the council to keep its deficits below 25%.
The ratings on KCDC continue to reflect our opinion of thevery strong institutional framework benefiting local governmentsin New Zealand, the council's strong liquidity and positivefinancial management, and zero exposure to Council ControlledOrganizations (CCO). Moderating these strengths are KCDC's veryheavy debt burden and a weak budgetary performance with moderatefiscal flexibility.
Our views on the strength of the council's financialmanagement are somewhat diminished because of the acceleratedpace of its borrowings. Nonetheless, we assess it as "positive".The New Zealand national framework sets international bestpractices for its local governments. Despite KCDC's relativesmall size, the council meets these standards, and, onoccasions, surpasses them; for example, the council engages inlong-term planning of up to 20 years, even though the centralmandate calls for 10 years. Its debt management has a strongfocus on intergenerational equity, and financial targets arewell-defined.
The council's high share of modifiable revenue offers somerevenue flexibility, in case it faces an extended period offinancial stress. More than 90% of Kapiti's revenues are deemedmodifiable. There are no statutory restrictions on the councilto increase rates, and we note that it has demonstrated somepolitical willingness to do so. The council does not have aself-imposed rate-cap policy. However, its large share ofelderly population would dictate that affordability weighsheavily on the council's considerations in any adjustments ofrates. In addition, the need to deliver an expandedinfrastructure program to match population growth constrainsKCDC's expenditure flexibility.
Notably, aside from the council's zero exposure to CCO, ithas no other known material contingent liabilities. This limitspotential unwelcome surprises to KCDC's fiscal position, in ourview.
The short-term rating on KCDC is 'A-1', reflecting ourpositive view of the council's liquidity. Over the next 12months, KCDC has NZ$13.5 million of principal repayment andinterest due. The council's cash on hand (NZ$1.35 million at endAugust 2012), plus its NZ$65 million in unutilized committedcredit facilities, gives KCDC a very comfortable debt-servicingcoverage of close to 500%. The council's debt-maturity profileis weighted toward longer-term borrowings. This furthermitigates short-term liquidity risks. Nevertheless, we note thatKCDC's rapid pace of debt accumulation will give rise to higherdebt-servicing needs, and inevitably will affect its liquidityratios.
The stable outlook reflects our expectation that thecouncil's debt will peak at 237% of revenue in fiscal 2014, andthereafter stay below 230%. Likewise, we envisage the council'sbudgetary performance will improve from fiscal 2015 once majorcapital projects are completed. Our estimates are based on thecouncil's projections in its latest LTP. The stable outlook onthe long-term rating extends up to two years.
The rating could come under pressure if the council'sbudgetary performance deteriorates over a prolonged period, withdeficits above 25% of revenue after capital spending. Deficitsof such magnitude would not be sustainable if they becomestructural in nature. This could happen if the council decidesto take on additional capital spending or if revenues aresignificantly lower than projected.
There is limited upside to the ratings, given that KCDC isset to increase debt rapidly over the next few years. Animprovement in the council's budgetary performance and reduceddebt levels would likely be the drivers for any positive ratingaction in the medium to long term.
Related Criteria And Research Methodology For Rating International Local And RegionalGovernments, Sept. 20, 2010 Ratings List Downgraded To From Kapiti Coast District Council Issuer Credit Rating A+/Stable/A-1 AA-/Stable/A-1+
Keywords: MARKETS RATINGS KAPITICOASTDISTRICTCOUNCIL