Auckland Council faces credit rating downgrade

New Zealand Herald,

15 November, 2011

Ballooning debt to pay for new electric trains and the inner city rail link has earned the Auckland Council a negative watch on its credit rating.

International credit ratings agency Standard & Poor's is getting the jitters about Mayor Len Brown's ambitious transport plans and warned of a credit downgrade from AA to AA-.

The agency has talking to the council about plans to significantly increase capital expenditure, particularly for transport, in Mr Brown's first 10-year budget.

Credit analyst Anna Hughes said it was unclear to the agency how much of this spending would be done with borrowed money, but council projections suggested that the council's debt level would exceed 170 per cent of operating revenue by 2013 and 200 per cent by 2015.

"We expected to resolve the credit watch during the next 90 days as the council finalises its draft 2012 long-term plan.

"Any rating action would not likely exceed one notch," she said.

The council's current debt is about $3.4 billion, but it is forecast to rise to about $4 billion next year and hit $8 billion by 2020.

The council is borrowing $543.7 million for the electric trains and $1.8 billion towards the $2.4 billion rail link.

Officers warned councillors this month that the council's credit rating would almost certainly be downgraded when its gross debt approached the debt to revenue limit of 175 per cent.

Chief finance officer Andrew McKenzie said a credit downgrade of one notch would increase the council's borrowing costs by between 0.1 per cent and 0.15 per cent.

This would mean extra interest payments of between $3 million and $15 million, he said.

Increased costs of about $14 million translate into a rates rise of about 1 per cent.

Mr McKenzie said there was nothing reckless about the level of debt, nor was the council being imprudent in exceeding the revenue limit of 175 per cent.

"So long as the council is prepared to commit the funding implications of being above that [175 per cent level]."

Councillor Cameron Brewer said the mayor's draft 10-year budget had given Standard & Poor's the shivers and he should show some fiscal prudence.

Mr Brown is in China and Hong Kong, but a mayoral spokesman said the review was not unexpected, as that Auckland Council had inherited books from eight former councils.

It was important to remember that at this stage it was only a review.