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Rating Action:

Moody's affirms City of Lugano's ratings to Aa3, outlook remains stable

19 Nov 2020

Paris, November 19, 2020 -- Moody's Public Sector Europe ("Moody's") has today affirmed City of Lugano's long-term issuer and debt ratings at Aa3 and maintained the stable outlook. Moody's also assigned a Aa3 senior unsecured rating to the city's upcoming CHF140 million bond issuance.

RATINGS RATIONALE

Today's affirmation of the Aa3 ratings reflects Lugano's sound financial performance, its prudent budgetary practices, and the city's strong economy. These credit positives are balanced by a high debt burden compared with peers. While acknowledging that the city's financials are negatively impacted by the coronavirus outbreak, Moody's considers that the impact will be limited to 2020/2021 fiscal years. Given the resilience of its well-diversified economy, we also consider that any long-lasting negative implications on Lugano's creditworthiness are unlikely.

Despite undergoing numerous mergers with neighboring municipalities over the last decade, the city has maintained a sound financial management as reflected in solid operating surplus averaging 12% of operating revenues between 2017 and 2019. Moody's expects Lugano's operating margins to decrease to around 6% in 2020 and 2021 fiscal years as a direct consequence of the coronavirus-induced fiscal pressure. Given the strong correlation of the city's tax revenue with the economic growth, the rating agency expects a gradual recovery from 2022 onwards in line with the national economy.

The strong economy and relative wealth have allowed Lugano to maintain a tax advantage compared to many other Swiss municipalities. Swiss municipalities are able to increase their tax rates up to the level set by their respective Canton. Unlike many other Ticino municipalities which have reached the maximum tax rate set by the Canton, the city of Lugano has some significant fiscal space left (representing around CHF75 million or 17% of its 2020 estimated operating revenue).

The Aa3 ratings also reflect the credit weakness arising from Lugano's debt burden. At YE2019, Lugano's net direct and indirect debt (NDID) amounted to CHF930 million, or 174% of realised operating revenue, which remains high compared to national and international peers. This is mainly due to the prolonged municipal merger process in the last decade and higher infrastructure needs as a result of urban expansion. Although Moody's expects Lugano's NDID to slightly increase in 2020 and 2021, the city should resume its deleveraging efforts from 2022 onwards in line with its medium term financial strategy to reduce debt.

The Aa3 long-term debt rating assigned to the CHF140 million upcoming issuance mirrors the City of Lugano's Aa3 long-term issuer rating. The bond proceeds will be largely used for refinancing purposes. Under the debt documentation provided, the notes are senior unsecured ranking pari passu with all other issuer's debenture.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that the city of Lugano's financial performance will remain positive and consistent with a Aa3 rating.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are not material to Lugano's rating. It has a very limited exposure to flood risk; nevertheless, it is not material given that the higher-tier governments would provide support in such a scenario.

Social considerations are not material to the city's rating. Budgetary pressures can emerge from increased social spending, but the provision of public services does not face material risks. We view the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. For Lugano, the shock transmits mainly through lower tax revenue, without long lasting implications on its creditworthiness.

Governance considerations are material to Lugano's rating. The city uses prudent financial planning, which is transparent and predictable.

The assignment of the long term debt rating required the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com

The specific economic indicators, as required by EU regulation, are not available for Lugano, City of. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Switzerland, Government of

GDP per capita (PPP basis, US$): 72,008 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.1% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.2% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 1.4% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 10.9% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: aa1

Default history: No default events (on bonds or loans) have been recorded since 1983.

SUMMARY OF MINUTES FROM RATING COMMITTEE

On 17 November 2020, a rating committee was called to discuss the rating of the Lugano, City of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed, the issuer's institutions and governance strength, have not materially changed, the issuer's governance and/or management, have not materially changed, the issuer's fiscal or financial strength, including its debt profile, has not materially changed, the systemic risk in which the issuer operates has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A significant decline of the debt level and/or a structural increase of gross operating balance would likely lead to an upgrade of Lugano's rating.

Downward pressure on the rating could result from a significant increase in net direct and indirect debt ratio above current expectations or from a deterioration of the city's operating surplus.

Lugano's rating incorporates a Baseline Credit Assessment (BCA) of aa3 and a moderate likelihood of extraordinary support from Ticino, Republic and Canton of (Aa2 stable).

The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elise Savoye
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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