Standard Poors Ratings CIPFA Scottish Treasury Management Forum

Standard & Poor’s Ratings CIPFA Scottish Treasury Management Forum Workshop How we assign a credit rating to a Local Authority Liesl Saldanha 24 February, 2012 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The Mc. Graw-Hill Companies, Inc. All rights reserved.

Structure of Presentation 1. Rating Definitions and Scales 2. Our View of U. K. Local Authorities 3. Rating Methodology for Local and Regional Governments 4. Process of Assigning a Rating 5. On-going Management Process to Maintain a Rating 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

What is a Standard & Poor’s rating? A rating reflects Standard & Poor’s current opinion of the likelihood that the issuer will make payments of principal and interest on a timely basis in accordance with the terms of the obligation. A rating does not constitute a recommendation to purchase, sell or hold a particular security. In addition, a rating does not comment on the suitability of an investment for a particular investor. 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

What is a rating? Standard & Poor’s Rating Scale Stronger credit quality CCC CC C Debt default 4. BBB BB B AAA AA A D Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Ratings from « AA » to « CCC » may be modified by the addition of a « + » or « - » sign to show relative standing within the major rating categories. Outlook : Long term grades may have a « stable » , « positive » or « negative » outlook. An outlook indicates the possible direction in which a rating may move over the next 18 to 24 months.

Our View of U. K. Local Authorities • Our long-term ratings on U. K. local authorities range from ‘AAA’ to ‘AA-’. The main rating differences reflect financial management, and the different levels of debt and reserves. • Despite the major reductions in government transfers, we still view the U. K. institutional framework as one of the strongest in the world from a credit perspective. • We are following the implications of the Localism Act 2011 and the proposed reforms to business rates, which apply mostly to local authorities in England Wales. We believe a key issue for Scottish local authorities, meanwhile, is likely to be the implications for the Scottish Government of the outcome of the Scotland Bill and the referendum on independence. • We view the role of the PWLB as very significant, providing local authorities with ready access to liquidity. 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

U. K. Local Authorities Rated by Standard & Poor’s, December 2011 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Analytic Framework to Assess Credit Worthiness 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Overview of Standard & Poor’s Methodology The analytical framework to rate non-U. S. local and regional governments (LRG) consists of combined quantitative and qualitative analysis around eight major factors: 8. • Institutional framework • Economy • Financial management • Budgetary flexibility • Budgetary performance • Liquidity • Debt burden • Contingent liabilities Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Summary Chart 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Introduction and Overview 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing the Institutional Framework 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Key Factors in Assessing the Institutional Framework • Predictability: • Frequency and extent of reforms affecting the intergovernmental system • Predictability of their outcome • LRG’s ability to influence or oppose reforms affecting their financial balance • Revenue and expenditure balance: • Overall adequacy of revenues to cover expenditure mandates, in the form of sufficient autonomy or state subsidies • Existence of a fiscal policy framework imposing prudent limits on LRG’s debt and deficit levels • Transparency and accountability: • Transparency and institutionalization of budgetary processes, • Disclosure and accounting standards for financial reporting in the LRG sector • Control levels and reliability of the information • Systemic support: • Level of ongoing support from higher levels of governments to ensure the provision of basic services and infrastructure • Degree of systemic extraordinary support in exceptional circumstance 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Standard & Poor's, Institutional Framework Assessments, December 2011 Group 1 (predictable and supportive) Group 2 (predictable and well-balanced) Group 3 (evolving but sound) Group 4 (consolidating but uneven) Group 5 (developing and unbalanced) Group 6 (volatile and underfunded) Australian states and municipalities Belgian regions and communities Czech municipalities Brazilian states and municipalities Argentinean states and municipalities Belarusian regions Australian municipalities in the state of Victoria Canadian provinces, municipalities and territories French new cities and French Polynesia Bulgarian municipalities Indonesian municipalities Nigerian states Austrian states French regions, departments, cities and intercities Israeli municipalities (tiers 1 and 2) Colombian districts Macedonian municipalities Philippine municipalities German states German municipalities in the state of North. Rhine Westphalia Italian normal status regions, provinces and municipalities Croatian municipalities Romanian municipalities Ukrainian municipalities and the autonomous republic New Zealand municipalities Italian special status regions Korean municipalities Hungarian municipalities Russian regions and municipalities Norwegian municipalities Japanese prefectures and cities Malaysian states Latvian municipalities Turkish municipalities Spanish foral regions Spanish normal status regions and provinces in foral regions Polish municipalities Mexican states and municipalities Swedish municipalities and counties Swiss municipalities in Cantons of Geneva and Vaud Spanish municipalities and provinces Swiss cantons U. S. states U. K. local authorities 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing the Individual Credit Profile 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

What our Individual Credit Profile Assessment Aims to Measure Economy – score aims to measure how economic factors are likely to impact an LRG’s revenue generation capability and spending needs, and ultimately its ability to service debt in the medium to long term. Financial Management – score aims to measure how the quality of an LRG’s financial management and its political context are likely to affect its willingness and ability to service debt over time. Budgetary Flexibility – score aims to measure how much an LRG could increase its revenues or reduce its expenditure in case of need, in order to maintain its debt service ability. Budgetary Performance – score aims to measure and forecast the level and the volatility of an LRG’s expected cash flows from operations and capital activities, and its surplus available to service debt. Liquidity – score aims to measure how LRG’s internal sources of liquidity, such as cash reserves and cash flow generation, and external sources, namely bank lines and market access, are likely to impact its debt servicing capability, primarily within the next 12 months. Debt Burden - aims to measure how our expectations for the level, structure, and sustainability of an LRG’s debt are likely to affect its debt-service capacity. Contingent Liabilities – aims to measure to what extent off-balance sheet risks and their relative size are likely to impair an LRG’s capacity to repay its debt in the medium-to-long term. 15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing an LRG’s Economy Rating Factors to assess the economic strength of an LRG: • Wealth and Income levels • GDP per capita: strength of tax base; expenditure needs • Diversification of the economic structure • Share of economic sectors in output and employment; employer concentration • Assessment of potential volatility of tax base and resilience to stress • Demographic Profile • Impact of population structure and growth on LRGs finances • Assessment of potential impact on revenues and expenditures, depending on budget structure • Growth prospects • Analysis of past and forecast GDP performance in the context of national economic development and competitive advantages or disadvantages of the LRG 16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing an LRG’s Economy 17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing an LRG’s Financial Management We assess financial management, with a view to its effect on creditworthiness, according to nine categories: • Transparency and disclosure • Budgeting • Long-term capital and financial planning • Revenue and expenditure management • Debt management • Reserve and liquidity management • Management of government-related entities • Political and managerial strength • External risk management 18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing an LRG’s Financial Management 19. Score Descriptor Typical Characteristics 1 Very Positive The LRG has very prudent fiscal targets backed by widespread political support and implemented by sophisticated managements. It has transparent and well-defined financial policies reflected in reliable and public long-term planning and very good reporting. The management demonstrates a high degree of expertise, through very good planning and monitoring, prudent and well defined debt and liquidity management, and active external risk management. 2 Positive The LRG has prudent financial policies and practices that ensure a good degree of transparency and fiscal discipline through the electoral cycles. The management demonstrates relevant expertise, through good planning and monitoring, prudent debt and liquidity management, and some monitoring of external risks. 3 Neutral The LRG has generally prudent financial policies, but they are frequently changed and may lack precision. The management is transparent and has adequate expertise, through good though not detailed planning and monitoring and generally prudent debt and liquidity management. But it may lack a comprehensive strategy to manage external risks. 4 Negative The LRG financial management is underdeveloped in some areas. In a stress scenario, the government may lack the political strength to impose fiscal discipline reporting meets the legal standard but is not very detailed and timely. Planning and monitoring are limited. The management of debt and liquidity maybe unpredictable to a degree, while any external risk mitigation is minimal. 5 Very Negative The LRG has a weak financial and credit culture, including poor monitoring and reported information that meets just the minimum requirements to maintain a rating. A lack of political stability makes it difficult to impose fiscal disciplines. The management lacks the relevant skills for planning and monitoring. The management of debt and liquidity is unpredictable and sometimes aggressive, while key external risks have not been identified. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Budgetary Flexibility 20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Budgetary Performance 21. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Liquidity 22. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Debt Burden Debt burden analysis focuses on the following factors: 23. • A forward-looking assessment of debt stocks and interest burden Key indicators: • Tax supported debt to consolidated operating revenues, includes: • Direct debt & debt of tax-supported entities • LRG operating revenues & own revenues of tax-supported entities • Interest to adjusted operating revenues • Potential volatility on the cost of debt from exposure to market risks: • Interest rate risk • Currency risk • Use of derivative instruments • Debt maturity profile • An assessment of other long-term liabilities, mostly unfunded pension liabilities Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Debt Burden 24. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Contingent Liabilities • Mostly qualitative, with focus on: – Nature of the risk – Materiality – Monitoring by LRG – Availability of contingency reserves • How do we assess risks? – When individual entity or transaction represents over 20% of LRG op revs: in-depth analysis – When contingent liabilities are numerous but individually very small: sector approach 25. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Assessing Contingent Liabilities 26. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Summary Chart 27. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Timetable for rating assignment • An interactive process that generally takes about six weeks Analytical team assigned Preliminary research Communication to entity Rating committee Meeting with entity Publication of rating (? ) Potential appeal Rating request Surveillance 28. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Process to maintain a rating • Please keep us informed – always • At least one annual face-to-face meeting • Information list will be provided well in advance of the annual meeting. • A collaborative relationship 29. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

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