Fitch Ratings releases improved economic outlook for ICC

The Invercargill City Council’s economic outlook has been revised to ‘Stable’ from ‘Negative’, and its credit rating affirmed as ‘AA’ by a leading global company in credit ratings and research, Fitch Ratings.

The news was welcomed by Chairman of Finance Cr Darren Ludlow, who said the outlook revision was the result of Fitch’s reassessment of the ICC’s debt structure.

He was delighted by Fitch’s affirmation that ICC’s revised rating reflected the Council’s solid budgetary performance, low level of debt relative to peers (comparing it favourably to Hamilton, Rotorua and Timaru) and New Zealand’s strong institutional framework.

Cr Ludlow said the credit rating would enhance Council’s international credibility in its financial dealings and reflected ICC’s conservative management approach and solid financial performance.

“It is confirmation from an independent source, with an international reputation, that Invercargill has been consistently well-managed over the years,” he said.

In releasing its findings Fitch Rating made the following observations:

Key rating drivers

Strong institutional framework: Fitch views New Zealand’s strong institutional framework as a key rating factor towards the rating assessment for the country’s local regional governments. The framework is demonstrated in Invercargill’s transparent reporting and financial disclosure, strong controls and supervision, a high level of own-source rate revenue, and limited expenditure responsibilities.

Debt increase manageable: Fitch expects ICC’s debt to see a gradual increase to fund ongoing infrastructure needs. We expect the payback period (direct debt/operating balance) to remain below 4.0x over the next two to three years. Fitch has deemed the NZD30 million ICC on-lent to subsidiary Invercargill Holdings Limited (ICHL) as non-tax-supported debt, considering ICHL’s financial self-sufficiency.  ICC’s adjusted payback period was 2.9x at the financial year ended June 2017 (FYE17), compared with 4.4x including the NZD30 million.

Short-term economic challenge: Invercargill has a relatively small economy that has been affected by the volatility in aluminium prices over the past two years. The aluminium smelting industry is an important contributor to GDP and employment. Fitch believes the short-term volatility is within a normal economic cycle and should not alter ICC’s overall credit profile, which is supported by stable budgetary performances.

Stable budgetary performance: Fitch expects the city to maintain sound budgetary performance over the forecast period as rates revenue tends to be less susceptible to the economic cycle. In FY17, the city’s operating margin improved slightly to 25%, supported by increases to the rates and rateable properties, and controlled spending; this was in line with a historic average of 24.9% over the past four years.

Profile comparable with ‘AA’ peers: ICC has stable operating metrics on a relative basis, while its debt level is much lower than its peers. ICC’s debt payback ratio of 2.9 years was much stronger than ‘AA-‘ rated domestic peers, such as Hamilton’s 9.0 years, Rotorua’s 8.3 years and Timaru’s 5.0 years at FY16. However, ICC’s smaller economy and short-term challenges may limit the Council’s debt ceiling threshold compared with peers at the same rating level.

Rating sensitivities

Fitch’s reassessment of ICC’s debt profile has resulted in a change in rating sensitivities.

Updated Long-Term Plan: ICC’s ratings would be under pressure if capital expenditure increases more than Fitch’s expectations, resulting in direct debt to current balance rising above 6x, a level that is more consistent with ‘AA-‘ peers.

Improving metrics: Positive rating actions could result from an improvement in the operating margin towards 30% and a direct debt to current balance ratio below 3x for a sustained period.