Fitch Publishes Queenstown Lakes District Council's 'AA-' Rating; Outlook Stable.
The ratings reflect New Zealand's strong institutional framework for local and regional councils, as well as QLDC's favourable demographic profile and stable fiscal performance. Fitch has also factored in expectations for an increase in QLDC's capex and hence a rising debt level, with leverage that should peak between FY21 and FY23.
KEY RATING DRIVERS
Strong Institutional Framework: New Zealand's strong institutional framework - a key rating factor in assessing the country's local regional governments - is demonstrated in QLDC's transparent reporting and financial disclosure, strong controls and supervision, a high level of own-source and predictable rate revenue and limited expenditure responsibilities.
Tourism-Driven Economic Growth: Fitch expects QLDC's economy to maintain above-national-average growth, driven by the district's increasing popularity as a tourist destination. Fitch also believes the district's favourable demographics, with the council expecting the district's population to rise by 30% over the next decade, will help expand QLDC's rateable base. However, the district's economy is less diversified than domestic peers' as tourism accounts for 31% of gross domestic product (GDP).
Solid Budgetary Performance: We assess QLDC's budgetary performance attribute as a rating strength, based on the stability of rate revenue, which tends to be less cyclical. The council has significant capital needs to improve service levels, which will be funded primarily by debt. Fitch expects a combination of rate increases and expanding rate-payer base to gradually drive QLDC's operating margin towards 30%, which will support the higher capex. The operating margin in FY17 was 26%.
Steadily Rising Debt: Fitch believes QLDC's debt attribute is on a negative trend due to expectations there will be a sizeable increase in capital spending in its revised FY18-FY28 long-term plan. Fitch expects QLDC's direct risk/current balance to peak at 17.4x in FY21 and 15.4x in FY23, followed by a gradual decline to below 14x thereafter on slower increase in capex. The council's stable budgetary performance and local government funding agency (LGFA) borrowing scheme, should mitigate potential volatility in capex financing needs.
Challenges from Unprecedented Growth: QLDC's high ratio of visitors/rate payers poses a financial challenge to increasing spending on infrastructure and housing. Financial support from the central government, including the NZD50 million interest-free Housing Infrastructure Fund (HIF) scheme, will be essential. We consider the HIF debt as "other Fitch classified debt", considering the soft-loan nature of central government interest-free loans.
Debt Remains Key: QLDC is likely to release an updated long-term plan for FY18-FY28 in March 2018. QLDC's ratings may come under pressure should debt rise by more than Fitch expects, resulting in a structural direct risk (including Fitch-classified debt)/current balance above 14x, through the cycle.
The ratings could be upgraded if the operating margin improves towards 30%, combined with a direct risk/current balance below 11x for a sustained period.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Apr 17, 2018|
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