OREANDA-NEWS. Fitch Ratings has affirmed Hamilton City Council's (Hamilton) Long- and Short-Term Local-Currency Issuer Default Ratings (IDR) at 'AA-' and 'F1+', respectively. The Outlook is Stable. At the same time, Fitch has affirmed the long-term local-currency senior unsecured rating of Hamilton's outstanding notes at 'AA-'.

The rating affirmations reflect the strong institutional framework for local and regional councils in New Zealand, as well as Hamilton's solid management and administration, sound fiscal performance, positive socio-economic profile, and debt metrics which have improved, but remain weaker than other highly rated international peers.

KEY RATING DRIVERS

New Zealand's strong institutional framework is an important positive rating factor. It includes transparent reporting and financial disclosure, strong controls and supervision, a high level of own-source revenues (rates), and limited responsibilities, mainly for water and road infrastructure.

Hamilton's management and governance are supported by clear policy guidelines and a rigorous planning process that includes 10-year long-term plans and 30-year infrastructure plans, which are updated every three years. Changes to the management organisation and operating structure support a well-articulated and clear strategy, and focused on generating greater efficiencies throughout the council's operations.

Fitch calculated a (cash-flow based) operating margin of 29.3% in the financial year ending June 2015 (FY15), down from 34.7% in FY14, but well above similarly rated international peers. Hamilton demonstrates strong financial management and as a result, Fitch believes the council capable of achieving its planned forecasts. Based on projections in the current 10-year long-term plan, the operating margin should average 31.3% over the four years to FY19 (average over the four years to FY15: 28.4%).

Hamilton is a small and growing diversified, services-led economy. The city's total population rose 1.9% in 2014 to around 153,000, and GDP increased 2.9% to NZD7.3bn in FY15. The city is a key service hub in a large agricultural (mainly dairy) region, with other key economic drivers being education, and research and development. The city had an unemployment rate of 7.2% at FYE15 which is above the national figure of 5.7%. However, the city is home to around 40,000 tertiary students, who skew the unemployment figure upwards.

Hamilton's debt/current revenue ratio is high relative to that of its international peers, but is supported by the council's good financial flexibility, including predictable revenues and access to funding from the New Zealand Local Government Funding Authority (LGFA). Debt ratios are improving due to improving fiscal performance that targets on-going surpluses and asset sales, and a self-imposed net debt-to-revenue limit of 200% across the long-term plan to 2025. Fitch calculated a debt/current revenue ratio of 211% at FYE15, down from 230% at FYE14.

An unexpected rise in capex requirements from higher-than-forecast growth, and pressure to remain below the council's self-imposed target debt ratios could result in a capex backlog. However, Fitch believes this risk is small given the council's pro-active and more sustainable approach to long-term infrastructure planning, as evidenced by an early adoption of the 30-year infrastructure planning requirement.

RATING SENSITIVITIES

Hamilton's ratings could come under pressure if its budgetary performance unexpectedly deteriorated significantly, with operating margins dropping to below 20%. Reduced fiscal flexibility most likely from a deteriorating economic environment could result in an adverse development in Hamilton's debt position.

Positive rating action would require Hamilton to generate sustained high current margins in excess of 25% and have a debt/current revenue ratio below 200%. Due to Hamilton's high relative debt levels it would need to demonstrate a sustained outperformance relative to less leveraged peers.