Dec 10 -
Summary analysis -- Woking Borough Council ------------------------ 10-Dec-2012
CREDIT RATING: A+/Negative/-- Country: United Kingdom
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
05-Dec-2012 A+/-- A+/--
22-Dec-2010 AA-/-- AA-/--
The lowering of the rating on Woking Borough Council (Woking, or the council) reflects Standard & Poor’s Ratings Services’ view that the council’s rising debt burden and contingent liabilities pressure its already weak budgetary performance (particularly relating to its high deficits after capital accounts) and very high tax-supported debt.
Due to its high proportion of own-source revenues, such as those from commercial rentals, Woking depends less on central government transfers than most U.K. local authorities. As a result, Woking has been able to post strong operating surpluses and maintain service levels while many other local authorities have had to reduce services following the reduction in grants from the central government. The council has demonstrated its revenue-raising capacity by managing a commercial rental business (the Wolsey Place shopping center) and we recognize that risk-mitigating measures have protected the related revenue stream to date. However, we consider Woking’s revenue profile to have become more vulnerable to volatility, due to its high dependence on operations that lie outside the core activities and services usually undertaken by a local authority.
We expect Woking’s tax-supported debt burden to rise over the rating horizon to 373% of consolidated operating revenues in 2015 following, in particular, the council’s decision to invest in the extension of Wolsey Place. The capital accounts averaged an estimated -42.6% of total adjusted revenues during 2011-2015. This figure includes the GBP98 million in additional debt the council incurred in March 2012 following the U.K. government’s Housing Revenue Account (HRA) reform. In return, this reform allows Woking to keep the surplus generated on the HRA account (about GBP2 million in 2013 and expected to rise thereafter).
In the longer term, we anticipate the council may take on more debt. This would align with its strategy to borrow in order to support business development, employment creation, and to stimulate activity in the local economy.
Woking’s ability to borrow cheaply from the Public Works Loan Board (PWLB), and on-lend to its subsidiaries as loans or capital investments, forms part of its investment strategy. While some investments have to date produced healthy revenues, other capital-intensive projects such as the construction and operation of energy plants have previously exposed the council to construction and operational risks. With some subsidiaries not currently profitable and/or in a net liability position, the council remains exposed to the risk of needing to borrow more to support subsidiary operations.
The rating remains supported by the U.K.’s very strong institutional framework, which we assess as “predictable and supportive” under our criteria. Woking’s credit quality also reflects the region’s high wealth and income levels, its economic diversity, and favorable economic profile and growth prospects.
Under our criteria, we view Woking’s liquidity position as neutral for the rating, particularly given its “exceptional” access to external liquidity via the PWLB.
Estimated free cash and liquid assets (after Standard & Poor’s deductions) average 14% of annual debt service. Like other U.K. local authorities, Woking’s policy is to minimize cash deposits for cost efficiency reasons.
Woking can readily borrow from the PWLB, as long as it adheres to the Prudential Borrowing Code, under self-assessed debt limits. The council raised its debt limit for fiscal year 2012 to GBP396 million, from GBP287 million, to absorb the GBP98.5 million additional debt stemming from the HRA reform.
The negative outlook reflects our view of a one-in-three likelihood that we could lower the rating again if Woking’s deficit after capital accounts and debt burden weakened beyond what we currently forecast in our base-case scenario, reflecting an increased risk appetite or greater exposure to volatile commercial revenues.
Stronger balances after capital accounts would be an important component of such an improvement. We could also lower the rating if Woking’s exposure to nontraditional business ventures were to result in diminished or volatile operating revenues that weakened its strong budget flexibility, or if its access to funding from the PWLB was weakened.
On the other hand, the rating could stabilize at the existing level if there is a sharper-than-expected improvement in the council’s budgetary performance and debt measures, led by positive balances after capital accounts and a declining debt burden.
Related Criteria And Research
-- Industry Report Card: Sector Reforms Are Unlikely To Damage U.K. Local And Regional Governments’ Strong Creditworthiness In The Short Term, March 23, 2012
-- Public Finance System Overview: U.K. Local and Regional Governments, April 5, 2011
-- Methodology For Rating International Local and Regional Governments, Sept. 20, 2010