• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Slough welcomes commitment that Office for Local Government ‘will not be a burden’

    June 30, 2022

  • Homes England agrees strategic partnership with two authorities

    June 29, 2022

  • Soaring inflation and pay pressures to add £3.6bn to council budgets

    June 28, 2022

  • Underfunded social care reforms could ‘exacerbate workforce pressures’

    June 27, 2022

  • Nottingham City Council leader labels proposed intervention as ‘disappointing’

    June 27, 2022

  • Government preparing to intervene in Nottingham City Council

    June 23, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

S&P affirms BCC rating at AA+

0
  • by Editor
  • in Funding
  • — 7 Nov, 2012

Standard & Poor’s today issued a statement affirming the ‘AA+’ long-term issuer credit rating of Birmingham City Council (BCC). The ratings rationale, including an outline of the conditions that could prompt an upgrade or downgrade make for interest reading:

“LONDON (Standard & Poor’s) Nov. 7, 2012–Standard & Poor’s Ratings Services today affirmed the ‘AA+’ long-term issuer credit rating on Birmingham City Council (BCC). The outlook is stable.

The rating affirmation reflects our view of the high levels of systemic support offered to BCC by the U.K.’s institutional framework, and BCC’s very positive liquidity position, which is supported by access to the Public Works Loan Board (PWLB) and through the council’s committed liquidity facilities. In our opinion, BCC’s financial management is prudent and “very positive”, as defined under our criteria. We believe that BCC’s management will successfully support the council in a period of funding reductions and significant sector changes.

We believe that reforms and public sector funding reductions will somewhat pressure BCC’s operating surplus levels and we are expecting further narrowing in BCC’s operating surplus levels as a result of the central government’s expected cut in transfers in 2014. We view this as a rating weakness. The rating is also constrained by Birmingham’s high tax-supported debt, expected to be about 106% of consolidated operating revenues by 2015.

As a result of the May 2012 elections, the Labour Party has gained political control of the council, taking over from the previous conservative/liberal democratic-party-led coalition government. We do not expect these election results to lead to significant changes to Birmingham’s strategic approach and fiscal discipline.

In 2012, notwithstanding the overall reduction in public sector resources, we estimate that BCC has posted an operating surplus of about 5% in cash terms. This is stronger than our expectations last year and is partly related to higher levels of revenue support grants than our forecasts, as well as material operating expenditure reduction. From now on the council will have to deal with the implementation of the business rates reform, additional funding reductions from the central government from 2014 on, and cost increases related to inflation.

We expect BCC will adjust its expenditure profile further, by making use of its additional operating expenditure flexibility while posting narrower operating surplus levels. Our base-case scenario assumes average operating surpluses narrowing to 0.2% in 2013-2015 from 3.4% in 2010-2012. We also expect BCC to reduce investment levels compared to previous years, partly in response to current austerity. However, the council is exposed to an equal-pay lawsuit that we estimate might lead to significant payments over the next four years. We note that the timing of these payments is uncertain at the moment and that the final exposure may increase over the next two years. However, in our base case we have assumed that BCC will fund these payments with additional borrowing, leading to average deficits after capital accounts of about 6% within the rating horizon.

In 2012, tax-supported debt levels have increased significantly to 98.0% of consolidated operating revenues, from 84.5% in 2011, largely as a consequence of the Housing Revenue Account Reform (HRA). The reform has allowed BCC to keep the surplus generated on the HRA account (about £10 million in 2013), but in exchange has required the council to take on £336 million of associated debt. BCC has funded this debt through a number of loans from the PWLB. Over the rating horizon, we expect tax-supported debt to increase to about 106% of consolidated operating revenues, partly as a result of the additional borrowing related to the equal-pay lawsuit. Adjusted for these non-recurrent payments, related to the HRA reform and the equal-pay lawsuit, we expect the city to post only limited debt increases.

We view BCC’s liquidity position as very positive for the rating. It is supported by the PWLB, which provides the council with a prompt source of liquidity. In September 2012, BCC’s estimated unrestricted funds after Standard & Poor’s haircuts (which assume a partial loss from selling investments in a stress scenario) totaled about 53.8% of estimated debt service in the financial year ending March 31, 2014. Including access to committed liquidity facilities of £360 million, we estimate liquidity to cover more than 240% of estimated debt service for financial year 2014.

Moreover, BCC benefits from exceptional access to external liquidity and it can readily borrow from PWLB, provided that it acts in accordance with the Prudential Borrowing Code. According to this code, the council assesses its own borrowing limits based on what it judges to be financially sustainable.

The stable outlook reflects our view that BCC will adjust to reforms and funding reductions by making use of its operating expenditure flexibility, as well as maintain a positive–albeit narrowing–operating performance and deficits after capital expenditure averaging between about 5% and 10% of total adjusted revenues from 2013 to 2015.

We could lower the rating if BCC’s management were to fail to use its expenditure flexibility to adjust to funding cuts, or to sustain its currently prudent financial strategy, leading to a structural deterioration of its financial performance and a debt increase beyond our base-case scenario.

Although unlikely, we may consider an upgrade in the case of a combination of factors, such as an improvement in Birmingham’s economy, as well as any reform leading to an increase in revenue flexibility. We would also view favorably an improvement in BCC’s financial performance leading to a reduction of leverage.”

Share

You may also like...

  • Finance chiefs may have to ’embrace the uncertainty’ in financial planning 11th Jun, 2021
  • Bags of capacity – now to housing delivery 12th May, 2022
  • Mike Thatcher: constructing a new role for local government 27th Jan, 2022
  • Whitehall should be ‘wary’ of council tax rises as an answer to funding 27th Oct, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • 151 BRIEFS – WHAT’s NEW?

    • Homes England agrees strategic partnership with two authorities
    • Soaring inflation and pay pressures to add £3.6bn to council budgets
    • Underfunded social care reforms could ‘exacerbate workforce pressures’
    • Nottingham City Council leader labels proposed intervention as ‘disappointing’
    • Government preparing to intervene in Nottingham City Council
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 17 hours ago

    Hillier confirmed as keynote speaker for LATIF/FDs’ Summit: Dame Meg Hillier, chair of the Public Accounts Committee, has been confirmed as a keynote speaker for Room151’s combined Local Authority Treasurers Investment Forum (LATIF) and FDs Summit. The… dlvr.it/ST70F7 pic.twitter.com/hxV676Iley

    Room151 17 hours ago

    Councils’ funding at risk due to ‘undercounting’ in census data: Population estimates in London and Manchester may have been significantly underestimated in the 2021 census potentially threatening government funding for frontline services in these… dlvr.it/ST707J pic.twitter.com/VncIyaXa01

    Room151 3 days ago

    Gove at LGA: councils to receive two-year financial settlement: Michael Gove has announced that councils will receive a two-year financial settlement from next year to provide authorities with “financial certainty” and allow them to plan ahead. The… dlvr.it/ST0kSV pic.twitter.com/wxL3UM4sGO

    Room151 3 days ago

    LGPS valuations: the digital journey: Rob Bilton explains how technology is helping to deliver one of the most complex data exercises in the world of public sector pensions. The 2022 valuations for LGPS funds in[...] dlvr.it/ST0kMq pic.twitter.com/VxjSPC2Uvo

    Room151 7 days ago

    Conrad Hall: ‘more sophisticated’ regulation needed for local government: The chair of the CIPFA/LASAAC Code Board has questioned the sophistication of financial regulation in local government and the continuing focus of the Department for Levelling Up,… dlvr.it/SSnPBV pic.twitter.com/G5d7JCWF8c

    Room151 1 week ago

    Slough Council approves plans to restructure finance department: Slough Borough Council has approved plans to restructure its finance department to enhance capacity and capability and to address a “significant weakness” in the function. The local… dlvr.it/SSf8DG pic.twitter.com/l5lmyHmkBg

  • Register to become a Room151 user

  • Previous story The US presidential election: immediate reflections on Mr Obama’s victory
  • Next story National Fraud Authority launches online toolkit

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares