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Rating Action:

Moody's downgrades Bermuda's rating to A2, outlook stable

03 Jun 2016

New York, June 03, 2016 -- Moody's Investors Service has today downgraded Bermuda's issuer and senior unsecured ratings to A2 from A1. The outlook remains stable.

The key drivers of today's rating downgrade are the following:

1) Despite improved economic prospects, Bermuda's economic strength continues to lag that of A1-rated sovereigns.

2) Bermuda's fiscal strength continues to trail many A1-rated peers due to its high interest burden even as its debt metrics have stabilized at a moderate level.

The stable outlook reflects our view that with economic prospects beginning to improve and the government's consolidation program expected to support a gradual improvement in the fiscal position, debt metrics will remain stable over the rating horizon.

The country's foreign currency long-term bond and bank deposit ceilings were changed to Aa3 from Aa2 and A2 from A1, respectively. Foreign currency bond and deposit ceilings remain P-1. The local currency ceilings were changed to Aa3.

RATINGS RATIONALE

RATIONALE FOR THE RATING DOWNGRADE TO A2

FIRST DRIVER -- BERMUDA'S LOWER ECONOMIC STRENGTH RELATIVE TO A1 PEERS

Despite having experienced positive growth in 2015 for the first time since 2008, Bermuda's economic strength remains some way below that of its A1 rating peers. At 'Moderate (-)', Moody's assessment of its economic strength is below the 'High' median score for A1-rated sovereigns, and more in line with lower A-rated peers.

That score balances Bermuda's high level of wealth and a highly internationally-competitive insurance industry, against its small, open economy and weak growth performance and prospects. On a comparative basis, Bermuda's economy of $5.8 billion is very significantly smaller than the 'A1' median of $256 billion. Even as the country emerges from recession, we do not think that the negative impact of its size on its credit profile will be compensated for by growth: we forecast that Bermuda will grow on average 1.8% annually in 2016-20, lower than the 3.0% median forecast for A-rated peers.

The latter factors weigh on the island's overall economic resilience and point to Bermuda's higher susceptibility to shocks than A1-rated sovereigns.

SECOND DRIVER -- HIGHER INTEREST BURDEN DESPITE MODERATE DEBT LEVELS

Despite continued challenging economic conditions, the government's adjustment measures taken under the Medium Term Expenditure Framework have led to the stabilization of its debt-to-GDP ratio at about 40% since 2013. At this level, Bermuda's debt burden is in line with the median for A1-rated sovereigns.

However, given Bermuda's more narrow revenue base, its interest burden is significantly higher than that of its A1 rating peers, with the interest payments-to-revenue ratio exceeding 12% -- the second highest among A-rated sovereigns -- compared to a 4.5% 'A1' median. The need to devote greater resources to servicing its debt leaves Bermuda with considerably lower fiscal flexibility than its A1-rated peers and less able to absorb shocks. Moody's assessment of Bermuda's fiscal strength remains 'High (-)', below the 'Very High (-)' median score for A1-rated sovereigns.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook is predicated on a return to positive, if moderate, economic growth and declining budget deficits in the next few years which should allow Bermuda to retain economic and fiscal strength consistent with its A2 peers. The Bermudian economy experienced a recession between 2009 and 2014, with output contracting on average 3.3% annually. Moody's estimates that Bermuda emerged from this recession in 2015, with GDP expanding about 1.5% in real terms last year.

Positive economic momentum should carry into 2016 and 2017 supported by increased tourism activity related to the 2017 America's Cup, as well as by increased investment on tourism-related and public infrastructure projects. Moody's expects that the economy will accelerate to 2.3% on average in 2016-17 and will grow 1.0-2.0% during the following three years.

The fiscal outlook will be closely tied to the economy's performance as additional deficit reductions will rest more on revenue measures in coming years. Authorities envisage balancing the budget by 2018/19. This fiscal path would ensure that the government's debt metrics remain stable, although Moody's does not expect a significant decline of the interest burden.

WHAT COULD CHANGE THE RATING - UP

Upward ratings pressure would emerge if the economy accelerated significantly beyond Moody's current expectations of growth of about 2.0% and this led to a rapid reduction of the debt burden.

WHAT COULD CHANGE THE RATING - DOWN

Downward pressure on Bermuda's rating could arise if the economic recovery fails to take hold, complicating the government's efforts to reduce fiscal imbalances. Additionally, an upward debt trajectory due to fiscal slippage that jeopardizes public finance sustainability would be credit negative.

GDP per capita (PPP basis, US$): 52,350 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.5% (2015 Estimated) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.8% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -2.4% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 13.2% (2015 Actual) (also known as External Balance)

External debt/GDP: 123.2% (2015 Actual)

Level of economic development: Moderate level of economic resilience

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

On 01 June 2016, a rating committee was called to discuss the rating of the Government of Bermuda. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, have not materially changed. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Renzo Merino
Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Bermuda's rating to A2, outlook stable
No Related Data.
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