June 2, 2017 / 8:18 PM / 7 months ago

Fitch Affirms Wandsworth Council at 'AA'; Outlook Negative

(The following statement was released by the rating agency) BARCELONA, June 02 (Fitch) Fitch Ratings has affirmed the London Borough of Wandsworth's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'AA' with Negative Outlooks and Short-Term Foreign Currency IDR at 'F1+'. The ratings reflect Wandsworth's wealthy socio-economic profile and focused financial management, conservative budgeting, low debt, strong cash position and high reserves in place. However the ratings also reflect low operating margins and limited flexibility to raise revenue. The Negative Outlook reflects that on the UK sovereign (AA/Negative). KEY RATING DRIVERS Local authorities (LAs), such as Wandsworth, are highly dependent on central government transfers as they have limited tax-setting powers. LAs had their government funding from grants cut by 36% overall between FY10 and FY15 (fiscal year ending March) and face further cuts from FY17 to FY20 with the phasing-out of the revenue support grant. The move to full retention of local business rates has now been put on hold due to the forthcoming general election. LAs have a statutory obligation to present a balanced budget. As such and due to the cuts in grants, Wandsworth has explored various ways of reducing operating costs. The borough has a successful track record in reducing costs while maintaining high resident satisfaction. Since 2010, over GBP135 million has been reduced from Wandsworth's general fund budget. In FY16 the borough was able to make GBP25 million of efficiencies in one year. With a budget size of about GBP900 million, a large part of Wandsworth's savings over FY17-FY19 will come from planned budget reductions and ongoing reviews to improve effectiveness and efficiency. In October 2016 the borough entered into a shared staffing arrangement with the London Borough of Richmond to establish a single staffing structure for both councils to achieve savings equivalent to GBP10 million per year per borough mainly from reduced staffing costs and efficiencies generated from joint working such as procurement. Fitch views this as credit positive for the council. To keep council tax increases within 3.99%, Wandsworth estimates total savings of just over GBP7 million by FY20 need to be achieved in addition to those already in the pipeline. For FY18 and FY19, the borough expects to have to resort to use of reserves of a total of around GBP20 million. This is in the context of usable reserves of GBP614 million at FYE16, of which approximately GBP190 million are either un-earmarked or earmarked for specific general fund uses and can be considered free reserves and GBP507 million in cash and short-term investments. With a growing population of over 320,000 Wandsworth remains a prosperous borough and has above-average wealth levels compared with London and national averages. The borough has an employment rate of 80%, above the London average of 73%. Council revenue collection is expected to increase from council tax and business rates as a result of privately financed development projects. Wandsworth is also involved in a couple of council-led regeneration schemes involving around 3,000 units of houses. The borough has GBP250 million reserves in its housing revenue account, of which up to GBP150 million will be used for these programmes. At FYE16, Wandsworth's operating balance was just over GBP55 million (FYE15: just under GBP20 million), and the operating margins improved to 7% (FYE15: 2%), while debt servicing over current revenue remained broadly stable at 3%. Surplus before debt variation was GBP80 million and Fitch expects the borough to be able to maintain stable performance over the term of the next spending review based on the ability to further implement efficiencies. Fitch's base case assumes that the borough's performance will remain resilient in the face of possible adverse shocks. Total debt was reduced by GBP20 million in FY17 to GBP138 million and is expected to continue decreasing at the same pace over the medium term ,in line with the amortisation of the Public Works Loan Board loan. Net liabilities could stem from the council's net pension liabilities, which at FYE16 totalled GBP315 million with total contributions by the Authority in year at GBP30 million. Although the coverage of liabilities was twice the level of total debt at FYE16 it is still a risk. However, the most recent triennial actuarial valuation assessed a 100% funding ratio compared with an average 75% in London. RATING SENSITIVITIES As Wandsworth's IDR is constrained by the sovereign, a downgrade of the sovereign would lead to a downgrade of the borough. A downgrade of Wandsworth's intrinsic credit profile could result from an inability to deliver the savings expected to compensate for the declining revenue support grants, an increase in debt beyond Fitch's expectations and a failure to consistently and sufficiently cover debt service with the operating balance. Continued prudent management and a structural and sustained improvement in budgetary performance over and above the average over the past five years would trigger an upgrade, providing the sovereign is also upgraded. Contact: Primary Analyst Ines Callahan Director +34 93 467 87 45 Fitch Ratings Espana S.A.U. Av. Diagonal 601 Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 323 84 10 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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