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Fitch Affirms Wandsworth Council at 'AA'; Outlook Negative
December 2, 2016 / 5:06 PM / a year ago

Fitch Affirms Wandsworth Council at 'AA'; Outlook Negative

(The following statement was released by the rating agency) BARCELONA, December 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 the UK's strong institutional framework and Wandsworth's focused financial management, conservative budgeting, and low debt. 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 an overall 36% 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 and a move to full retention of local business rates. 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 GBP135m has been reduced from Wandsworth's general fund budget. A large part of Wandsworth's savings over FY17-FY19 will come from planned budget reductions and ongoing reviews to improve effectiveness and efficiency by transforming the way services are delivered. 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. Both councils will retain their own autonomy in full. Initially the focus is on merging management structures, and reducing duplication and the proportion of spending on senior management. The Chief Executive is Wandsworth's previous CE and of the six Directors, three are from Wandsworth and three from Richmond. The aim of the arrangements is to achieve savings equivalent to GBP10m 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 although some risk remains as to whether the arrangement will be implemented in a timely and successful manner. To keep council tax increases within 3.99%, Wandsworth estimates total savings of GBP30m over FY18 and FY19 will need to be achieved, or 4% of operating revenue. The borough expects to have to resort to the use of reserves in FY18 and FY19 of a total of GBP10m out of usable reserves of GBP614m, of which GBP507m are cash and short-term investments. 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 GBP250m reserves in its housing revenue account, of which up to GBP100m will be used for these programmes. At FYE16, Wandsworth's operating balance was GBP56m (FYE15: GBP18m), and operating margins improved to 7% (FYE15: 2%), while debt servicing over current revenue remained broadly stable at 3.3% (FYE15: 2.6%). However, the surplus before debt variation was below the average GBP100m for the previous three years at GBP80m. 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 efficiency reductions. Total debt was reduced by GBP20m in FY16 to GBP156m and is expected to continue decreasing at the same pace over the medium term. This will be in line with the amortisation of the Public Works Loan Board loan. At FYE16, Wandsworth maintained total investment assets of GBP524m, which had risen to GBP588m by end-October 2016.. Net liabilities could stem from the council's net pension liabilities, which at FYE16 totalled GBP315m with total contributions at GBP30m. The most recent triennial actuarial valuation assessed a 95% funding ratio compared with an average 75% in London. Although Wandsworth has the second-highest coverage of liabilities among LAs in England and Wales it is still a risk, as it was twice the level of total debt at FYE16. 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. Paseo de Gracia 85, 7 Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 323 84 10 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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 _id=1015771 Solicitation Status here 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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