NOTE: On October 30, 2020, the press release was corrected as follows: The first paragraph of the ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS section was changed to: “In Moody’s assessment, environmental considerations are not material to Sutton’s rating. Social considerations are material to Sutton’s rating – these include the risks related to the coronavirus outbreak and the measures put in place to contain it. The most significant financial impacts on Sutton come from the increased cost of adult and children’s social care and housing provision over the course of the outbreak, plus reductions in fees and charges, business rates and council tax. Governance considerations are also material to Sutton’s rating. Sutton’s standards of governance are high, aligned with general standards of governance across the UK local authority sector. Its risk appetite is low, as evidenced by its low exposure to commercial risk within its capital programme;” the first paragraph of the SUMMARY OF MINUTES FROM RATING COMMITTEE section was changed to: “On 22 October 2020, a rating committee was called to discuss the issuer rating of the London Borough of Sutton and debt rating of european primary placement Facility (eppf) S.A. acting on behalf of its compartment London Borough of Sutton . The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, the issuer's institutions and governance strength, the issuer's governance and/or management, the issuer's fiscal or financial strength, including its debt profile, the systemic risk in which the issuer operates, the issuer's susceptibility to event risks.” Revised release follows.
London, 28 October 2020 -- Moody's Public Sector Europe, ("Moody's")
has today assigned a Aa3 issuer rating to the London Borough of Sutton,
outlook stable, and a (P)Aa3 debt rating to its proposed debt issuance
through european primary placement facility (eppf) S.A.
acting on behalf of its compartment London Borough of Sutton.
RATINGS RATIONALE
The Aa3 rating assigned to the London Borough of Sutton (Sutton) and the
(P)Aa3 debt rating assigned to the debt vehicle reflect the issuer's
prudent financial management, moderate levels of debt and low-risk
capital programme and relatively low reserves levels alongside the supportive
institutional framework for UK local authorities.
Sutton's debt levels are moderate at approximately 80% of
gross operating revenues at FYE2020. Moody's expects debt
to increase to around 100% of gross operating revenues by FY2024,
but remain lower than many rated peers. The GBP250 million
debt (GBP150 million of which to be retained) planned to be issued
through the european primary placement facility in late 2020 will be used
to refinance internal borrowing and short-term debt with the remainder
used to fund its capital programme over the next four years.
Its capital programme includes GBP219 million of expenditure,
with GBP118 million dedicated to projects within its General Fund
budget and GBP101 million within its Housing Revenue Account.
Compared to many rated peers this programme is modest and has low exposure
to commercial risk. This reflects Sutton's strong governance,
including prudent financial management and limited risk appetite,
which is a key credit strength of the council. At present around
1% of gross operating revenues are from commercial sources and
this is not expected to change materially.
Its primary credit challenge is a relatively low level of usable reserves
compared to peers -- at GBP75 million at FYE2020 this represents
some 16% of gross operating revenues. In FY2021, there
is a risk that Sutton will need to draw down some of its reserves balance
to fund its coronavirus-related funding gap. Sutton's
estimated gross funding gap is GBP17.5 million in FY2021,
with a net funding gap of around GBP2 million after government compensation.
Moody's considers that a one-off drawdown in this fiscal
year would not have material credit implications but if the crisis has
a prolonged impact on Sutton's finances requiring further drawdowns
this could put some pressure on the rating.
As per the application of Moody's Joint Default Analysis for regional
and local governments, London Borough of Sutton's assigned
Baseline Credit Assessment (BCA) is a2. The final rating of Aa3
incorporates the uplift provided by Moody's assessment of a high likelihood
of support from the UK government.
RATIONALE FOR STABLE OUTLOOK
Sutton's stable outlook reflects Moody's view that Sutton
has sufficient budgetary buffers, in the form of usable reserves
and expenditure flexibility, to be able to offset the medium term
impacts of the coronavirus pandemic. It also reflects the stable
outlook on the UK sovereign.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
In Moody’s assessment, environmental considerations are not material to Sutton’s rating. Social considerations are material to Sutton’s rating – these include the risks related to the coronavirus outbreak and the measures put in place to contain it. The most significant financial impacts on Sutton come from the increased cost of adult and children’s social care and housing provision over the course of the outbreak, plus reductions in fees and charges, business rates and council tax. Governance considerations are also material to Sutton’s rating. Sutton’s standards of governance are high, aligned with general standards of governance across the UK local authority sector. Its risk appetite is low, as evidenced by its low exposure to commercial risk within its capital programme.
The specific economic indicators, as required by EU regulation,
are not available for these entities. The following national economic
indicators are relevant to the sovereign rating, which was used
as an input to this credit rating action.
Sovereign Issuer: United Kingdom, Government of
GDP per capita (PPP basis, US$): 44,288(2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): (10.1)% (2020 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1% (2020
Actual)
Gen. Gov. Financial Balance/GDP: -18.5%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.7% (2020 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: a1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 22 October 2020, a rating committee was called to discuss the issuer rating of the London Borough of Sutton and debt rating of european primary placement Facility (eppf) S.A. acting on behalf of its compartment London Borough of Sutton . The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, the issuer's institutions and governance strength, the issuer's governance and/or management, the issuer's fiscal or financial strength, including its debt profile, the systemic risk in which the issuer operates, the issuer's susceptibility to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade could result from an upgrade of the sovereign rating and a
significant strengthening in financial performance leading to a substantial
increase in reserves, in addition to a material reduction in debt
levels.
One or a combination of the following could result in downward pressure
on the ratings: a material increase in debt levels beyond that expected;
a deterioration in financial performance and reserves; increasing
exposure to economic risk through investment in commercial property and
other commercial activities; and/or a downgrade of the sovereign
rating or a weakening of the UK's strong institutional framework
for local authorities.
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.
This rating action concerns a new rating for an issuer not previously
publicly rated by us at the time that the sovereign release calendar was
published, and is therefore being released on a date not listed
in that publication.
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.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
Zoe Jankel
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
