London, April 29, 2022 -- Moody's Investors Service ("Moody's") has today downgraded Warrington Borough Council's (Warrington) long term issuer rating and senior unsecured debt rating to A3 from A2 and baseline credit assessment to baa3 from baa2. The stable outlook was maintained.
RATINGS RATIONALE
The downgrades reflect Warrington's significant exposure to risks arising from its high reliance on commercial income, its high and rising debt burden and ongoing budgetary pressures resulting in expected declines in reserves.
Warrington has become increasingly reliant on commercial income within its net budget, with its intended strategy to offset future expenditure pressures using income generated from its range of commercial investments, including its large property portfolio. The proportion of commercial income is high at around 15% of its net budget in FY2022, and commercial investments account for a large share of debt. While this has provided a net benefit to its budget as government grants have declined in recent years, Moody's considers this to be a high amount of risk and a higher risk appetite than is typical for the sector, exposing the council to significant levels of economic, counterparty and political risk.
In January 2022, Together Energy, an energy supplier owned by the council, stopped trading following significant increases in wholesale energy costs, and was placed under administration. The amount the council will recover from this investment is not yet known, however as of January 2022, the council had £18 million in equity, a loan of £18.8 million and a guarantee worth around £29 million in Together Energy. While Moody's expects that the loss to the council will likely be less than the value of the equity, the collapse of the entity outlines the risks to the council from these commercial investments.
Moody's expects the council to limit its commercial investments in the future considering recent changes to the PWLB's lending terms that make them less permissive for local authorities intending to use its lending to fund the acquisition of non-financial assets. However the risk accumulated to date will continue to weigh on Warrington's credit quality.
Warrington's debt stood at £1.6 billion at FYE2021 (309% of operating revenue), and is expected to continue to increase with additional borrowing projected. However, this is very dependent on drawdowns on loan facilities agreed with housing associations - this represents around £435 million of the planned £729 million capital programme to FY2025. Moody's expects that drawdowns and borrowing will be less than projected with debt levels rising slower than the projected 420% of operating revenue at FYE2024. Nevertheless, debt levels are very high and will continue to rise. Interest costs, however, are projected to remain relatively moderate as a percentage of operating revenues, at 5% of gross operating revenues in FY2021 rising to 6% in FY2023.
Warrington achieved cumulative savings of £60.6 million between FY2018 to FY2021, enabling it to balance its budget without significant drawdowns on reserves over this period. However, Moody's anticipates the level of usable reserves will decline over the medium term given budgetary pressures and a revision to minimum revenue provision charges in its commercial property investment portfolio, which Warrington had not been applying to its budget though it had been contributing to a corporate risk reserve. Warrington has a lower level of usable reserves as a share of operating revenue than some of its rated UK peers, which provides less flexibility to compensate for budgetary pressures. Moreover, Warrington needs to find further savings to achieve balanced budgets in coming years. The majority of its savings will be focused in its families and wellbeing services, including adult and children's social care, which represents over 65% of its gross expenditure. Savings will be increasingly difficult to find as demand also increases due to an ageing population combined with cost pressures including staff shortages and inflationary pressures.
As per the application of Moody's Joint Default Analysis for regional and local governments, Warrington's Baseline Credit Assessment (BCA) is baa3 and the final rating of A3 incorporates the uplift provided by Moody's assessment of a high likelihood of support from the UK government in the event of severe liquidity stress.
RATIONALE FOR THE STABLE OUTLOOK
Warrington's stable outlook reflects the stable outlook on the UK sovereign in addition to our view that Warrington has sufficient budgetary buffers, in the form of usable reserves and budgetary flexibility, to be able to mitigate expenditure and revenue volatility over the medium term.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the sovereign rating or a sustained material reduction in debt levels and exposure to commercial revenues and investments could exert positive pressure on Warrington's rating.
A material increase in the level of borrowing beyond that currently expected, a significant drawdown on usable reserves, non-payments or delayed payments on loans made to housing associations or shortfalls of revenues from its other commercial investments or a weakening of the institutional framework for local authorities would exert downward pressure on the rating. Additionally, a downgrade of the UK sovereign rating would exert downward pressure on the rating.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
In Moody's assessment, environmental considerations are not material to Warrington's rating. Social considerations are material to Warrington's credit profile, similar to other local authorities. These considerations include the risks related to the coronavirus pandemic and the measures put in place to contain it. The most significant financial impacts on upper tier and unitary local authorities come from demographic pressures from the increased costs of provision of adult and children's social care and housing provision over the course of the outbreak and beyond. Governance considerations are also material to Warrington's credit profile. Warrington's investment strategy has demonstrated a high appetite for risk and led to rapid growth in debt and high reliance on more volatile revenue streams. However, local authorities including Warrington, display high governance standards, with governance of capital finance directed by the sector's Prudential Code, which is designed to ensure capital plans are affordable, prudent and sustainable. Data transparency is strong, with all material spending decisions published on websites, along with budgets, capital plans, policies and accounts.
The specific economic indicators, as required by UK regulation, are not available for Warrington Borough Council. 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$): 45,329 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -9.3% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.8% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -12.9% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.5% (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 26 April 2022, a rating committee was called to discuss the rating of the Warrington Borough Council. The main points raised during the discussion were: The issuer's governance and/or management, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.
PRINCIPAL METHODOLOGY
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.
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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Jennifer A. Wong, CFA
VP - Senior Credit Officer
Sub-Sovereign Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
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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:
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