Paris, January 10, 2023 -- Moody's Investors Service ("Moody's") has today assigned a Aa3 senior unsecured debt rating to the upcoming first blockchain-based bond issuance (the notes) of the City of Lugano (Lugano or the City, Aa3 stable), a fixed-rate digital bond of up to CHF100 million. Lugano's outlook is stable.
RATINGS RATIONALE
The Aa3 debt rating mirrors the City's long-term issuer rating of Aa3 and is equal to debt ratings assigned by Moody's to Lugano's traditional bond issuances. The notes will have the same status of the issuer's senior unsecured rated bonds and, in Moody's view, the different technology will not add materially higher risks compared to a traditional issuance.
According to the draft prospectus available to Moody's, the notes will constitute direct, unconditional, unsubordinated and unsecured obligations of the issuer, and will rank pari passu with all other present and future direct, unconditional, unsubordinated and unsecured obligations. Investors will have the same rights as traditional bondholders.
The key difference from other outstanding bonds of Lugano is that the notes will be dual listed and traded on the traditional infrastructure of SIX Swiss Exchange (SIS) and on SIX Digital Exchange's (SDX) private permissioned blockchain-based platform. SDX will perform all post-trade services. The issuer and investors will receive respectively the issuance proceeds and repayments in Swiss Francs.
While the digital platform has a relatively limited track record, Moody's assesses technology-related risks to be effectively mitigated or equivalent to those of a traditional issuance. SDX blockchain-based platform is subject to stringent regulations requiring to meet the same quality standards as traditional infrastructures. SDX and SIS share the same comprehensive business continuity plan and the grace period of 10 days leaves some time to remedy possible disruptions. The private permissioned nature of SDX's blockchain platform reduces technology-related cyber risks and in Moody's understanding the digital bond issuance does not increase the issuer's cyber risk exposure because there are no direct links between Lugano's IT systems and SDX blockchain platform.
In Moody's view, the ultimate credit risk faced by investors is that of the City of Lugano. The issuer's Aa3 rating is underpinned by Lugano's sound financial performance, supported by strong governance and wealthy economy, large fiscal potential and robust cantonal institutional framework. The rating also reflects the city's high debt exposure and high debt service, which requires careful treasury management. The issuer's credit profile also factors in a moderate likelihood of support from the Republic and Canton of Ticino (Aa2 stable) if the city were to face acute liquidity stress.
The stable outlook reflects the city's commitment to financial equilibrium that should enable Lugano to maintain balanced budgets and limit debt level increase despite the growing pressures on margins from inflation and energy costs.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Lugano's ESG Credit Impact Score is positive (CIS-1), reflecting a very strong governance profile and neutral-to-low exposure to environmental and social risks.
Moody's assesses Lugano's environmental issuer profile score as neutral-to-low (E-2). Environmental risks, including carbon transition, water management, natural capital, and waste and pollution, pose neutral-to-low risks for the city. At the same time, Lugano's exposure to physical climate risks is moderately negative, reflecting increasingly volatile weather conditions and a growing number of heat stress episodes. This climate change-related environmental trend may cause losses in productivity, weigh on investment and exert pressure on the city's revenue base.
Moody's overall assessment of Lugano's social issuer profile results in a neutral-to-low score (S-2). Lugano's workforce is highly educated, and residents benefit from outstanding access to basic services and strong levels of public health and safety. However, high housing costs imply a moderately negative exposure to housing risk. Lugano's financial performance is supported by a wealthy services-based economy. The city is moderately negatively exposed to demographic risks, notably population ageing, with budgetary pressure that can emerge from increased social spending.
Lugano's highly transparent and very strong management and governance practices are captured by a positive governance issuer profile score (G-1). The city's finances benefit from the mature and robust cantonal institutional framework. Strong oversight by the Republic and Canton of Ticino and Lugano's commitment to financial equilibrium will perdure, and will contribute to its ability to meet and even exceed fiscal targets. Sound debt management, based on clear guidelines, combined with careful treasury management, supports liquidity and mitigates risks stemming from high and volatile debt service.
The publication of this rating action deviates from the previously scheduled release dates in the EU sovereign calendar published on https://ratings.moodys.com. This action was prompted by the City of Lugano's decision to issue a new bond issuance.
ECONOMIC DATA
The specific economic indicators, as required by EU regulation, are not available for the City of Lugano. 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$): 77,741 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 4.2% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.5% (2021)
Gen. Gov. Financial Balance/GDP: -0.5% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 7.4% (2021) (also known as External Balance)
External debt/GDP: 292.3% (2021)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 10 January 2023, 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. The notes will have the same status of the issuer's senior unsecured rated bonds and the different technology will not add materially higher risks compared to a traditional issuance.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Given that the issuance rating is tied to the long-term issuer rating of the City of Lugano, the same factors and considerations generally apply.
A combination of the following could have positive rating implications: Lugano's Aa3 rating could be upgraded if there is a structural decline in debt and a structural increase in the city's GOB. An improvement in the credit strength of the Republic and Canton of Ticino could also result in an upgrade of Lugano's rating.
Lugano's Aa3 rating could be downgraded if the city's net direct and indirect debt ratio increases significantly or if a deterioration in the economic performance causes the city's operating margin to decline significantly. The weakening of credit strength of the Republic and Canton of Ticino or - although not likely - a sovereign downgrade could also result in a downgrade of Lugano's rating.
The principal methodology used in this rating was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Emanuela Colzani
Analyst
Sub-Sovereign Group
Moody's France SAS
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Marie Diron
MD - Sovereign Risk
Sub-Sovereign Group
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Client Service: 44 20 7772 5454
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