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Ratings On Palmerston North City Council Affirmed At 'AA/A-1+' On Very High Budgetary Flexibility; Outlook Remains Stable

Wednesday June 5 2013

"Palmerston North displays very high budgetary flexibility with modifiable revenues of about 90% of operating revenues, and a strong and diverse local economy with per capita income of about US$34,000," Standard & Poor's credit analyst Anthony Walker said. "In addition, New Zealand's predictable and supportive institutional framework supports the council's credit quality."

Partially offsetting these strengths are the council's very high debt burden, and our neutral view of its liquidity. We expect Palmerston North's high debt burden as a percentage of adjusted operating revenues will reduce to about 135% in 2015 (after Standard & Poor's adjustments), from a peak of about 190% in 2008. The council's debt-servicing ratio is about 90% of the next 12 months' debt and interest repayments.

"The stable outlook reflects our expectations that Palmerston North will continue to manage its financial position within the current metrics for a 'AA' rating over the next two years," said Mr. Walker. "Given that the ratings on the council are equal with the New Zealand sovereign foreign currency rating, we consider that they are unlikely to be raised in the short-to-medium term."

Downward rating pressure would occur if there is a change in policy affecting budgetary flexibility (such as bringing forward major infrastructure) causing the council's operating position to deteriorate. Such a scenario would include the council's after-capital account deficits sustaining at more than 10% of total revenues, causing an increase in its debt and interest burden over the next two years. We see this scenario as unlikely.