Councils confident about finances despite Moody’s Brexit downgrade
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Photo: © European Union 2016 – Source : EPAP images.
Local authorities are confident that downgrades to credit ratings in the sector will not affect the cost of their borrowing.
Earlier this week, Moody’s announced that it had affirmed the ratings of four local authorities, Transport for London, and 42 housing associations but downgraded their outlook from stable to negative.
This follows the agency’s decision the day after the Brexit vote to change its outlook on the UK’s long-term issuer and debt ratings to negative from stable, while affirming both ratings at Aa1.
A statement from Moody’s said: “Moody’s believes that there will be a prolonged period of uncertainty following the ‘leave’ vote, which will weigh on the UK’s economic and financial performance.
“A downturn in the economic outlook in the UK has direct implications for UK sub-sovereign budgets through potential slowing or declining transfers received from the central government, which make up a significant share of their revenue; and further potential austerity measures included in the government’s next budget and next spending review.”
The reduction in the outlook affects Moody’s ratings for Guildford Borough Council, Cornwall Council, Lancashire County Council and Warrington Borough Council.
Victoria Worsfold, senior accountant (treasury management & capital) at Guildford Borough Council, told Room151: “We were expecting this action after Moody’s issued its stance in April, so it is no surprise.
“We didn’t want it to happen, but it is not a reflection on our financial management.
“However, when you are issuing bonds, a lot is dependent on the rates on the day you issue it.
“We spoke to Warrington Borough Council about its bond and it said it didn’t think there was a huge differential in the rate they would have got if they had been rated one notch higher.”
She said that the council didn’t have any current plans to issue a bond but would be considering funding options for a number of large infrastructure schemes later this year.
But the news is set to get even worse for councils and housing associations with ratings from Moody’s rivals, Standard & Poors (S&P) and Fitch.
S&P dropped the UK’s sovereign credit rating by two grades – from AAA to AA, while Fitch reduced it by one grade. Both said further cuts to ratings could follow.
In a statement, S&P said: “Many of our ratings on UK local governments and other public bodies benefit from our assumption that the UK government would be willing and able to provide extraordinary support to avoid a payment default by such bodies.
“That assumption extends to sectors, such as social housing, where many of our ratings include one notch or more for government support and mirror that of the sovereign. Highly rated UK local governments are in a similar situation.
“Therefore, while any direct impact from a leave vote is likely to be modest and only materialise over time, we are likely to lower the ratings on a number of these bodies following a sovereign downgrade.”
S&P currently provides ratings to Birmingham City Council (AA+), Woking Borough Council (AA-) and the Greater London Authority (AA+).
A spokesperson for Fitch told Room 151 that it was likely “action will be taken this week”, most likely on Friday.
The only local authority to which it provides a public rating is London Borough of Wandsworth (AA+).
Chris Buss, director of finance at Wandsworth, told Room151: “Any downgrade for us will be purely based on the downgrade to the sovereign rating.
“It won’t affect us. We are not thinking of borrowing at the moment and we don’t think it will affect our ability to loan to other authorities, most of which don’t have any sort of rating.”
