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Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard.

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Presentation on theme: "Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard."— Presentation transcript:

1 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Standard & Poor’s Ratings CIPFA Scottish Treasury Management Forum Workshop How we assign a credit rating to a Local Authority Liesl Saldanha 24 February, 2012

2 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Structure of Presentation 1.Rating Definitions and Scales 2.Our View of U.K. Local Authorities 3.Rating Methodology for Local and Regional Governments 4.Process of Assigning a Rating 5.On-going Management Process to Maintain a Rating

3 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. What is a Standard & Poor’s rating? A rating reflects Standard & Poor’s current opinion of the likelihood that the issuer will make payments of principal and interest on a timely basis in accordance with the terms of the obligation. A rating does not constitute a recommendation to purchase, sell or hold a particular security. In addition, a rating does not comment on the suitability of an investment for a particular investor.

4 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Ratings from « AA » to « CCC » may be modified by the addition of a « + » or « - » sign to show relative standing within the major rating categories. Stronger credit quality Debt default AAA AA A BBB BB B CCC CC C D Outlook : Long term grades may have a « stable », « positive » or « negative » outlook. An outlook indicates the possible direction in which a rating may move over the next 18 to 24 months. Standard & Poor’s Rating Scale What is a rating?

5 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Our View of U.K. Local Authorities Our long-term ratings on U.K. local authorities range from ‘AAA’ to ‘AA-’. The main rating differences reflect financial management, and the different levels of debt and reserves. Despite the major reductions in government transfers, we still view the U.K. institutional framework as one of the strongest in the world from a credit perspective. We are following the implications of the Localism Act 2011 and the proposed reforms to business rates, which apply mostly to local authorities in England and Wales. We believe a key issue for Scottish local authorities, meanwhile, is likely to be the implications for the Scottish Government of the outcome of the Scotland Bill and the referendum on independence. We view the role of the PWLB as very significant, providing local authorities with ready access to liquidity.

6 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. U.K. Local Authorities Rated by Standard & Poor’s, December 2011

7 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Analytic Framework to Assess Credit Worthiness

8 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Overview of Standard & Poor’s Methodology The analytical framework to rate non-U.S. local and regional governments (LRG) consists of combined quantitative and qualitative analysis around eight major factors: Institutional framework Economy Financial management Budgetary flexibility Budgetary performance Liquidity Debt burden Contingent liabilities

9 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Summary Chart

10 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Introduction and Overview

11 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing the Institutional Framework

12 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Key Factors in Assessing the Institutional Framework Predictability: Frequency and extent of reforms affecting the intergovernmental system Predictability of their outcome LRG’s ability to influence or oppose reforms affecting their financial balance Revenue and expenditure balance: Overall adequacy of revenues to cover expenditure mandates, in the form of sufficient autonomy or state subsidies Existence of a fiscal policy framework imposing prudent limits on LRG’s debt and deficit levels Transparency and accountability: Transparency and institutionalization of budgetary processes, Disclosure and accounting standards for financial reporting in the LRG sector Control levels and reliability of the information Systemic support: Level of ongoing support from higher levels of governments to ensure the provision of basic services and infrastructure Degree of systemic extraordinary support in exceptional circumstance

13 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Standard & Poor's, Institutional Framework Assessments, December 2011 Group 1 (predictable and supportive) Group 2 (predictable and well-balanced) Group 3 (evolving but sound) Group 4 (consolidating but uneven) Group 5 (developing and unbalanced) Group 6 (volatile and underfunded) Australian states and municipalities Belgian regions and communities Czech municipalities Brazilian states and municipalities Argentinean states and municipalitiesBelarusian regions Australian municipalities in the state of Victoria Canadian provinces, municipalities and territories French new cities and French Polynesia Bulgarian municipalities Indonesian municipalitiesNigerian states Austrian states French regions, departments, cities and intercities Israeli municipalities (tiers 1 and 2)Colombian districts Macedonian municipalities Philippine municipalities German states German municipalities in the state of North- Rhine Westphalia Italian normal status regions, provinces and municipalities Croatian municipalities Romanian municipalities Ukrainian municipalities and the autonomous republic New Zealand municipalities Italian special status regions Korean municipalities Hungarian municipalities Russian regions and municipalities Norwegian municipalities Japanese prefectures and citiesMalaysian statesLatvian municipalitiesTurkish municipalities Spanish foral regions Spanish normal status regions and provinces in foral regionsPolish municipalities Mexican states and municipalities Swedish municipalities and counties Swiss municipalities in Cantons of Geneva and Vaud Spanish municipalities and provinces Swiss cantonsU.S. states U.K. local authorities

14 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing the Individual Credit Profile

15 15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Economy – score aims to measure how economic factors are likely to impact an LRG’s revenue generation capability and spending needs, and ultimately its ability to service debt in the medium to long term. Financial Management – score aims to measure how the quality of an LRG’s financial management and its political context are likely to affect its willingness and ability to service debt over time. Budgetary Flexibility – score aims to measure how much an LRG could increase its revenues or reduce its expenditure in case of need, in order to maintain its debt service ability. Budgetary Performance – score aims to measure and forecast the level and the volatility of an LRG’s expected cash flows from operations and capital activities, and its surplus available to service debt. Liquidity – score aims to measure how LRG’s internal sources of liquidity, such as cash reserves and cash flow generation, and external sources, namely bank lines and market access, are likely to impact its debt servicing capability, primarily within the next 12 months. Debt Burden - aims to measure how our expectations for the level, structure, and sustainability of an LRG’s debt are likely to affect its debt-service capacity. Contingent Liabilities – aims to measure to what extent off-balance sheet risks and their relative size are likely to impair an LRG’s capacity to repay its debt in the medium-to-long term. What our Individual Credit Profile Assessment Aims to Measure

16 16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Rating Factors to assess the economic strength of an LRG: Wealth and Income levels GDP per capita: strength of tax base; expenditure needs Diversification of the economic structure Share of economic sectors in output and employment; employer concentration Assessment of potential volatility of tax base and resilience to stress Demographic Profile Impact of population structure and growth on LRGs finances Assessment of potential impact on revenues and expenditures, depending on budget structure Growth prospects Analysis of past and forecast GDP performance in the context of national economic development and competitive advantages or disadvantages of the LRG Assessing an LRG’s Economy

17 17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing an LRG’s Economy

18 18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing an LRG’s Financial Management We assess financial management, with a view to its effect on creditworthiness, according to nine categories: Transparency and disclosure Budgeting Long-term capital and financial planning Revenue and expenditure management Debt management Reserve and liquidity management Management of government-related entities Political and managerial strength External risk management

19 19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. ScoreDescriptorTypical Characteristics 1Very Positive The LRG has very prudent fiscal targets backed by widespread political support and implemented by sophisticated managements. It has transparent and well-defined financial policies reflected in reliable and public long-term planning and very good reporting. The management demonstrates a high degree of expertise, through very good planning and monitoring, prudent and well defined debt and liquidity management, and active external risk management. 2PositiveThe LRG has prudent financial policies and practices that ensure a good degree of transparency and fiscal discipline through the electoral cycles. The management demonstrates relevant expertise, through good planning and monitoring, prudent debt and liquidity management, and some monitoring of external risks. 3NeutralThe LRG has generally prudent financial policies, but they are frequently changed and may lack precision. The management is transparent and has adequate expertise, through good though not detailed planning and monitoring and generally prudent debt and liquidity management. But it may lack a comprehensive strategy to manage external risks. 4NegativeThe LRG financial management is underdeveloped in some areas. In a stress scenario, the government may lack the political strength to impose fiscal discipline reporting meets the legal standard but is not very detailed and timely. Planning and monitoring are limited. The management of debt and liquidity maybe unpredictable to a degree, while any external risk mitigation is minimal. 5Very Negative The LRG has a weak financial and credit culture, including poor monitoring and reported information that meets just the minimum requirements to maintain a rating. A lack of political stability makes it difficult to impose fiscal disciplines. The management lacks the relevant skills for planning and monitoring. The management of debt and liquidity is unpredictable and sometimes aggressive, while key external risks have not been identified. Assessing an LRG’s Financial Management

20 20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing Budgetary Flexibility

21 21. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing Budgetary Performance

22 22. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing Liquidity

23 23. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Debt burden analysis focuses on the following factors: A forward-looking assessment of debt stocks and interest burden Key indicators: Tax supported debt to consolidated operating revenues, includes: Direct debt & debt of tax-supported entities LRG operating revenues & own revenues of tax-supported entities Interest to adjusted operating revenues Potential volatility on the cost of debt from exposure to market risks: Interest rate risk Currency risk Use of derivative instruments Debt maturity profile An assessment of other long-term liabilities, mostly unfunded pension liabilities Assessing Debt Burden

24 24. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing Debt Burden

25 25. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing Contingent Liabilities Mostly qualitative, with focus on: –Nature of the risk –Materiality –Monitoring by LRG –Availability of contingency reserves How do we assess risks? –When individual entity or transaction represents over 20% of LRG op revs: in-depth analysis –When contingent liabilities are numerous but individually very small: sector approach

26 26. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessing Contingent Liabilities

27 27. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Summary Chart

28 28. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Timetable for rating assignment An interactive process that generally takes about six weeks Preliminary research Rating committee Communication to entity Meeting with entity Potential appeal Publication of rating (?) Surveillance Rating request Analytical team assigned

29 29. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Process to maintain a rating Please keep us informed – always At least one annual face-to-face meeting Information list will be provided well in advance of the annual meeting. A collaborative relationship

30 30. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P’s opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non–public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at STANDARD & POOR’S, S&P, GLOBAL CREDIT PORTAL and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC.


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