OREANDA-NEWS. Fitch Ratings has affirmed Invercargill City Council's (Invercargill) 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 Invercargill's outstanding notes at 'AA'.

The rating affirmations reflect the strong institutional framework for local and regional councils in New Zealand, a sound socio-economic profile, Invercargill's conservative management approach and historically solid fiscal performances. They also consider the council's future debt metrics - which although forecast to rise - will remain comparable to median debt ratios of other 'AA' rated local and regional governments.

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 water and road infrastructure.

Invercargill's fiscal performance has been consistently solid. Fitch calculated a (cash-flow) operating margin of 25.3% in the financial year ending June 2015 (FYE15), up from 23.5% in FY14 and above similarly rated international peers. Moreover, over the five years to FYE15 the operating margin has averaged 26.9%. This performance lends support to the council achieving the forecasts in its 10 year long-term plan, and our forecast operating margin projected to average 24.4% over the four years to FYE19.

Invercargill has traditionally maintained conservative debt metrics, and despite higher forecast capex resulting in an increase in direct debt of 66% to NZD47.9m at FYE15 (FYE14: NZD28.9m), higher debt ratios are supported by solid fiscal performances and will remain comparable to 'AA' peers. Invercargill's payback (debt/current balance) ratio improved to 1.7 years at FYE15 from 1.8 years at FYE14, but is projected to rise to 3.9 years by FYE18 before falling back to 2.6 years by FYE19. Direct debt as a percentage of current revenue was 39.3% at FYE15 and is forecast to peak at 68.3% in FY18 before declining to 46.7% at FYE25 on growing revenues.

Invercargill's management and governance are supported by clear policy guidelines and a rigorous planning process. This includes production of a 10 year long-term plan (LTP), and 30 year infrastructure plan, both requiring extensive public consultation. The mayor, chief executive and chairman of finance have served since 1998, 1986 and 1974, respectively and this has helped ensure consistency in policy and strategic direction.

Invercargill is a small manufacturing led economy which results in some labour market concentration. The sector accounts for around 18% of the working population, with its largest employer (and for the wider Southland region) the Tiwai Aluminium Smelter. The smelter provides employment for around 3,000 people in the region (800 directly). Invercargill's total population of around 54,200 increased by 1% in FY15, and the city's GDP of around NZD2.5bn in 2013 equates to 1.2% of the national GDP. The city is a key hub for a large agricultural region that includes dairying, forestry and fishing, and through an attractive zero fee rate policy at the Southern Institute of Technology, has developed a large student population.

RATING SENSITIVITIES
Invercargill's ratings could come under pressure, if unexpectedly its operating performance deteriorated significantly, with operating margins dropping towards 15% and its direct debt to current balance increasing above three years for a prolonged period. A significant increase in the debt of any non self-supporting public sector entities could also pressure the ratings.

Positive rating action would require greater diversification in the economy and expansion of the tax base.