Credit Ratings for European Regional and Local Governments Credit ...
Credit Ratings for European Regional and Local Governments Credit ...
Credit Ratings for European Regional and Local Governments Credit ...
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Moody’s Investors Service<br />
<strong>Credit</strong> <strong>Ratings</strong> <strong>for</strong> <strong>European</strong><br />
<strong>Regional</strong> <strong>and</strong> <strong>Local</strong><br />
<strong>Governments</strong><br />
Alex<strong>and</strong>er Ievlev IMC(UKSIP)<br />
Business Development Officer<br />
<strong>Local</strong> Economic Development<br />
Support International Conference<br />
Tbilisi, Georgia<br />
16-17 May 2007
LRG Development Challenges<br />
<strong>Regional</strong> Economies<br />
• The public sector in CEE needs to become more efficient at restructuring<br />
• The tax base of towns <strong>and</strong> municipalities/regions is often overly dependent on a<br />
single enterprise or industry <strong>and</strong> not dependent enough on the service sector<br />
• Many CEE Sub-Sovereigns will continue to experience pressure from the growing<br />
dem<strong>and</strong> <strong>for</strong> public services <strong>and</strong> social expenditure, including salaries<br />
• Investment needs will also increase pressure on the Sub-Sovereigns’ financial<br />
per<strong>for</strong>mance, debt burdens <strong>and</strong> creditworthiness <strong>for</strong> the <strong>for</strong>eseeable future. The<br />
cities in CEE are mostly involved in the reconstruction <strong>and</strong> building of new road<br />
<strong>and</strong> underground lines <strong>and</strong> networks, upgrading of tram <strong>and</strong> bus fleets <strong>and</strong> the<br />
reconstruction of local water waste-treatment systems<br />
• Risk of Finance <strong>and</strong> Economy instability – possibility of revenue decrease<br />
• Poor diversification of budget income sources<br />
• Undeveloped local financial markets<br />
Deficit of funding<br />
2
Gross Borrowing by Country<br />
(million, €) 2006e % Europe 2005e % Europe 2004 % Europe 2003<br />
Western Europe<br />
Germany 130,000 60.2 125,021 59.0 90,243 56.2 73,850<br />
Italy 17,100 7.9 16,518 7.8 15,402 9.6 15,489<br />
France 15,800 7.3 15,700 7.4 15,600 14,300<br />
Spain 12,712 5.9 15,312 7.2 12,120 7.6 14,552<br />
Switzerl<strong>and</strong> 11,864 5.5 13,445 6.4 13,136 8.2 14,544<br />
U.K. 4,137 1.9 5,414 2.6 5,050 3.1 3,257<br />
Austria 1,960 0.9 2,150 1.0 898 0.6 1,076<br />
Belgium 3,200 1.5 3,700 1.7 3,500 2.2 2,000<br />
Norway 2,269 1.1 2,374 1.1 2,013 1.3 2,699<br />
Finl<strong>and</strong> 715 0.3 910 0.4 1,500 0.9 1,200<br />
Denmark 600 0.3 572 0.3 612 0.4 515<br />
Sweden 438 0.2 429 0.2 361 0.2 379<br />
Total Western Europe 200,795 93.0 201,545 95.2 160,434 100.0 143,862<br />
Central <strong>and</strong> Eastern Europe (CEE)<br />
Russia 8,594 4.0 6,650 3.1 N.A. N.A. N.A.<br />
Turkey 1,952 0.9 275 0.1 N.A. N.A. N.A.<br />
Pol<strong>and</strong> 1,688 0.8 1,538 0.7 N.A. N.A. N.A.<br />
Czech Republic 1,607 0.7 687 0.3 N.A. N.A. N.A.<br />
Hungary 510 0.2 156 0.1 N.A. N.A. N.A.<br />
Ukraine 400 0.2 251 0.1 N.A. N.A. N.A.<br />
Latvia 133 0.1 21 0.0 N.A. N.A. N.A.<br />
Romania 120 0.1 527 0.2 N.A. N.A. N.A.<br />
Croatia 56 0.0 59 0.0 N.A. N.A. N.A.<br />
Lithuania 21 0.0 0 0.0 N.A. N.A. N.A.<br />
Bulgaria 20 0.0 21 0.0 N.A. N.A. N.A.<br />
Total CEE 15,101 7.0 10,185 4.8 N.A. N.A. N.A.<br />
TOTAL EUROPE 215,896 100.0 211,730 100.0 160,434 100.0 143,862<br />
E—Estimated. N.A.-Not available.<br />
3
Bond Yield v <strong>Credit</strong> Rating<br />
4
LRG bond issuance in 2005<br />
Belgium, 0.37<br />
Ukraine, 0.27<br />
UK, 0.39<br />
Sweden, 0.19<br />
Spain, 5.34<br />
Mexico, 0.01<br />
Austria, 0.14<br />
Switzerl<strong>and</strong>,<br />
1.69<br />
Russia, 2.29<br />
Estonia, 0.01 France, 1.1<br />
Canada, 24.21<br />
Germany, 50<br />
Romania, 0.63<br />
Italy, 4.84<br />
Japan, 8.53<br />
Germany<br />
Italy<br />
Japan<br />
Mexico<br />
Romania<br />
Russia<br />
Spain<br />
Sweden<br />
Switzerl<strong>and</strong><br />
UK<br />
Austria<br />
Ukraine<br />
Belgium<br />
Source: DEXIA<br />
5
Factors which influence credit rating<br />
Our analysis of an RLG’s intrinsic credit quality focuses on:<br />
• Operating environment<br />
• Institutional framework<br />
• Financial condition <strong>and</strong> per<strong>for</strong>mance<br />
• Debt profile<br />
• Governance <strong>and</strong> management practices<br />
• Economic fundamentals<br />
• Extraordinary support from higher-tier govt.<br />
6
Moody’s <strong>Ratings</strong> of Sovereign <strong>and</strong><br />
Sub-Sovereign <strong>Governments</strong><br />
Founded in 1900, Moody’s Investors Service has become the<br />
world’s leading provider of <strong>Credit</strong> <strong>Ratings</strong> <strong>for</strong><br />
<strong>Regional</strong>, Municipal <strong>and</strong> <strong>Local</strong> <strong>Governments</strong> Worldwide<br />
• Over 117 sovereign ratings<br />
• 325 ratings on sub-sovereign entities<br />
in 43 countries, including 182 ratings<br />
in Europe (compared to just 26<br />
<strong>European</strong> sub-sovereigns rated in<br />
1993)<br />
7
Moody’s in Numbers<br />
• 2,700 employees in 20 countries<br />
• 1,000 analysts, including 170 in public & local government<br />
sector<br />
• Tracks more than $35 trillion of debt<br />
• Over 100,000 public finance obligations<br />
• Over 16,500 client investors worldwide<br />
www.moodys.com<br />
www.moodyseurope.com<br />
8
Moody’s RLG Analytical Team<br />
• High Academic Qualifications<br />
• Cutting Edge Analytical Methodology<br />
• Multilingual - 11 languages spoken<br />
• Multinational - 12 nationalities represented<br />
• In depth analytical experience of public finances<br />
• Generally nationals of applicants’ countries<br />
9
Moody’s Presence in CEE Countries (as per 12.03.2007)<br />
Moody’s is a market leader in <strong>European</strong> emerging markets with 65<br />
sub-sovereign ratings including 8 Capitals. Some of them are…<br />
Hungary – Aa1<br />
City of Budapest A2<br />
Czech Republic – Aa1<br />
City of Brno A2<br />
Moravian-Silesian<br />
Region<br />
A2<br />
City of Ostrava A2<br />
City of Prague A1<br />
Bulgaria – A1<br />
City of Pazardjik<br />
Ba3<br />
Kazakhstan – A2<br />
City of Almaty Ba1<br />
City of Astana Ba1<br />
Ukraine – Ba3<br />
City of Kyiv B1<br />
City of Kharkiv B1<br />
Pol<strong>and</strong> – Aa1<br />
City of Poznan<br />
A3<br />
Croatia – A1<br />
City of Zagreb Baa1<br />
Turkey – B1<br />
Metropolitan Municipality<br />
of Istanbul B1<br />
Estonia – Aa1<br />
City of Tallinn A3<br />
Russia – A2<br />
Republic of<br />
Bashkortostan<br />
Republic of Komi<br />
City of Moscow<br />
Oblast of Moscow<br />
Oblast of Perm<br />
City of<br />
St Petersburg<br />
Oblast of Samara<br />
Republic of<br />
Tatarstan<br />
Ba1<br />
Ba2<br />
Baa1<br />
Ba2<br />
Ba1<br />
Baa2<br />
Ba1<br />
Ba1<br />
Latvia – А1<br />
City of Riga<br />
А2<br />
10
Moody’s Strength<br />
• We are the credit rating agency with the largest rating<br />
coverage of Sub-Sovereign entities in Emerging Europe -<br />
including eight capital cities - Moody's is regarded as the<br />
"benchmark" rating agency <strong>for</strong> local <strong>and</strong> regional<br />
governments in that region<br />
• The team consist of Senior Analysts who are specialists in<br />
the ratings of CEE Sub-Sovereigns - ten years of experience<br />
on average, many of them also bringing direct working<br />
experience in government.<br />
• Our analytical framework is based on more than 90 years of<br />
experience in rating regional <strong>and</strong> local governments<br />
worldwide<br />
• Moody's is the agency with the most transparent <strong>and</strong><br />
advanced methodology <strong>for</strong> rating regional <strong>and</strong> local<br />
governments<br />
11
What is a <strong>Credit</strong> Rating<br />
Definition…<br />
A rating is an independent opinion on the capacity of<br />
an issuer to meet its financial obligations fully <strong>and</strong> on<br />
time<br />
Application…<br />
An essential summary on creditworthiness <strong>and</strong><br />
investment attractiveness <strong>for</strong> investment decision<br />
making process in a global capital market<br />
12
Principles & Characteristics of Moody’s <strong>Ratings</strong><br />
Principals<br />
• Independent opinion<br />
• Comparable across industry & internationally<br />
• Expression of opinion on credit risk alone<br />
Characteristics<br />
• Global consistency<br />
• Emphasis on qualitative aspects of analysis<br />
• Recognition of international <strong>and</strong> local characteristics<br />
13
What’s the Value of a Moody ’s Rating <strong>for</strong> Issuers<br />
• Provides wider access to the international financial market<br />
• Reduces funding costs<br />
• Offers a distinctive credibility to the Issuer’s financial<br />
communication<br />
• Delivers a multidimensional marketing tool to promote<br />
Issuer investment attractiveness <strong>and</strong> transparency<br />
14
What’s the Value of a Moody’s Rating<br />
•It can also serve as a multi-purpose tool:<br />
• To attract <strong>for</strong>eign direct investment<br />
• To negotiate better terms on bank loans<br />
• To develop sound budgetary policy framework<br />
• To present as a report card to the electorate<br />
15
How does a Moody ’s Rating create the Value <strong>for</strong><br />
Issuer<br />
…by providing a quick <strong>and</strong> reliable comparative assessment<br />
accepted by Investors in any financial market<br />
with…<br />
• Covering more than 90% of Eurobond market issuance<br />
(according to IFR)<br />
• Disseminating Issuers’ <strong>Ratings</strong> to over 16,500 Investors<br />
through multi-media channels<br />
16
Moody’s Rating Scale<br />
Maximum<br />
Investment<br />
Speculative<br />
Aaa<br />
Aa<br />
A<br />
Baa<br />
Ba<br />
B<br />
Caa<br />
Ca<br />
C<br />
Minimum<br />
A<br />
numerical<br />
indicator<br />
1, 2, 3<br />
applied<br />
from<br />
Aa to Ca<br />
17
Moody’s Idealised Cumulative Expected Loss<br />
1 2 3 4 5<br />
Aaa 0.0000% 0.0001% 0.0004% 0.0010% 0.0016%<br />
Aa1 0.0003% 0.0017% 0.0055% 0.0116% 0.0171%<br />
Aa2 0.0007% 0.0044% 0.0143% 0.0259% 0.0374%<br />
Aa3 0.0017% 0.0105% 0.0325% 0.0556% 0.0781%<br />
A1 0.0032% 0.0204% 0.0644% 0.1040% 0.1436%<br />
A2 0.0060% 0.0385% 0.1221% 0.1898% 0.2569%<br />
A3 0.0214% 0.0825% 0.1980% 0.2970% 0.4015%<br />
Baa1 0.0495% 0.1540% 0.3080% 0.4565% 0.6050%<br />
Baa2 0.0935% 0.2585% 0.4565% 0.6600% 0.8690%<br />
Baa3 0.2310% 0.5775% 0.9405% 1.3090% 1.6775%<br />
Ba1 0.4785% 1.1110% 1.7215% 2.3100% 2.9040%<br />
Ba2 0.8580% 1.9085% 2.8490% 3.7400% 4.6255%<br />
Ba3 1.5455% 3.0305% 4.3285% 5.3845% 6.5230%<br />
18
What does Moody’s <strong>Credit</strong> Rating Mean <strong>for</strong> the Issuer<br />
Externally…<br />
• An “International Business Card” <strong>for</strong> a global financial<br />
market<br />
• Summarizing Issuer per<strong>for</strong>mance in a way that well fit<br />
with Investors’ mindset<br />
• Defining <strong>and</strong> diversifying the pull of potential Investors<br />
Internally…<br />
• Providing a benchmarking <strong>for</strong> an assessment of Issuer<br />
per<strong>for</strong>mance<br />
• Establishing the horizons <strong>for</strong> the strategic <strong>and</strong> financial<br />
development<br />
19
Moody’s Knowledge of Sub-National Entities in CEE<br />
region<br />
Moody’s specialists will deliver a credit opinion<br />
even…<br />
• Lack of transparency in historical data<br />
• Financial reports built under local accounting st<strong>and</strong>ards<br />
• Unaudited financial statements<br />
20
Analytical Considerations <strong>for</strong> <strong>Regional</strong> <strong>and</strong> <strong>Local</strong><br />
<strong>Governments</strong><br />
• Institutional structure <strong>and</strong> legal framework<br />
• Political climate<br />
• Economic fundamentals<br />
• Financial per<strong>for</strong>mances <strong>and</strong> management<br />
• Budget structure: revenue, expenditure<br />
• Indebtedness<br />
21
Moody’s <strong>Ratings</strong> <strong>for</strong> <strong>European</strong> <strong>Regional</strong> & <strong>Local</strong> <strong>Governments</strong> – 1<br />
(25 January 06)<br />
Germany - Aaa<br />
L<strong>and</strong> Baden-Wuerttemberg Aaa<br />
Freistaat Bayern<br />
Aaa<br />
L<strong>and</strong> Berlin<br />
Aa3<br />
L<strong>and</strong> Br<strong>and</strong>enburg<br />
Aa2<br />
L<strong>and</strong> Nordrhein-Westfalen Aa2<br />
L<strong>and</strong> Sachsen-Anhalt<br />
Aa3<br />
Stadt Düsseldorf<br />
Aa1<br />
Bavaria, Free State of<br />
Aaa<br />
Saxony-Anhalt, L<strong>and</strong><br />
Aa3<br />
Austria - Aaa<br />
Bundesimmobiliengesellschaft m.b.H<br />
(BIG)<br />
Aaa<br />
City of Vienna<br />
Aaa<br />
France - Aaa<br />
Region of Centre<br />
Aa2<br />
Region of Champagne-Ardenne Aa2<br />
Département de l’Essone Aaa<br />
Département des Hauts-de-Seine Aa1<br />
Region Ile-de-France<br />
Aaa<br />
Communauté Urbaine de Lille Aaa<br />
Département du Lot-et-Garonne A2<br />
City of Lyon<br />
Aa2<br />
Département de la Manche Aa1<br />
Département de la Marne Aaa<br />
City of Marseille<br />
Aaa<br />
Département de la Meuse Aaa<br />
City of Narbonne<br />
Aa3<br />
Region of Rhone-Alpes<br />
Aaa<br />
City of Saint M<strong>and</strong>é<br />
Aa2<br />
City of Villeurbanne<br />
Aa1<br />
City of Plan-de-Cuques<br />
Aa1<br />
Italy– Aa2<br />
Region of Abruzzo A1<br />
Province of Arezzo Aa3 City of Milan<br />
Region of Basilicata A1 Province of Milan<br />
City of Bologna<br />
Aa2 Region of Molise<br />
City of Bari<br />
Aa3 City of Naples<br />
Province of Bologna Aa3 Province of Naples<br />
Province of Bolzano Aa1 City of Palermo<br />
Region of Calabria A2 Province of Palermo<br />
Region of Campania A3 Region of Puglia<br />
City of Catania<br />
A2 City of Rimini<br />
City of Civitavecchia A1 Province of Rimini<br />
Region of Emilia RomagnaAa2 Region of Sardinia<br />
City of Florence<br />
Aa2 Region of Sicily<br />
Province of Foggia A2 Province of Trento<br />
Province of Genoa Aa3 Province of Treviso<br />
City of La Spezia<br />
A1 Province of Turin<br />
City of L’Aquila<br />
A1 Region of Tuscany<br />
Region of Lazio<br />
A1 Region of Umbria<br />
City of Lecce<br />
A2 Region of Veneto<br />
Region of Liguria Aa3 City of Venice<br />
Region of Lombardy Aa1<br />
Region of Marche Aa3<br />
Belgium – Aa1<br />
Communauté Française de<br />
Belgique<br />
Aa1<br />
Community of Fl<strong>and</strong>ers Aa1<br />
Walloon Region<br />
Aa3<br />
Aa2<br />
Aa3<br />
A2<br />
A1<br />
Aa3<br />
Aa3<br />
A1<br />
A2<br />
Aa3<br />
Aa3<br />
A2<br />
A2<br />
Aa1<br />
Aa3<br />
Aa3<br />
Aa2<br />
Aa3<br />
Aa2<br />
Aa2<br />
22
Moody’s <strong>Ratings</strong> <strong>for</strong> <strong>European</strong> <strong>Regional</strong> & <strong>Local</strong> <strong>Governments</strong> - 2<br />
(25 January 06)<br />
Switzerl<strong>and</strong> - Aaa<br />
City of Neuchatel<br />
Aa3<br />
Norway – Aaa<br />
Oslo City<br />
Aa1<br />
Isle of Man - Aaa<br />
Sweden - Aaa<br />
City of Gothenburg<br />
City of Stockholm<br />
Aa2<br />
Aa1<br />
Spain – Aaa<br />
Diputación de Guipuzcoa<br />
Junta de Andalucia<br />
City of Barcelona<br />
Basque Country<br />
Comunidad de Cantabria<br />
Junta de Castilla y Leon<br />
Castilla-La Mancha<br />
Generalitat de Catalunya<br />
Junta de Extremadura<br />
Comunidad de Galicia<br />
Comunidad de Murcia<br />
Cabildo de Tenerife<br />
Generalitat de Valencia<br />
Portugal – Aa2<br />
Autonomous Region of Azores<br />
City of Lisbon<br />
Region of Madeira<br />
City of Sintra<br />
Aaa<br />
Aa3<br />
Aa2<br />
Aaa<br />
Aa3<br />
Aa2<br />
Aa2<br />
Aa3<br />
Aa3<br />
Aa3<br />
Aa3<br />
Aa2<br />
Aa3<br />
Aa3<br />
Aa2<br />
Aa3<br />
Aa2<br />
Denmark - Aaa<br />
City of Copenhagen<br />
Estonia – A1<br />
City of Tallinn<br />
Greece – A1<br />
Municipality of Amaroussion<br />
City of Athens<br />
Aa1<br />
A3<br />
Baa2<br />
A2<br />
23
Moody’s <strong>Ratings</strong> <strong>for</strong> <strong>European</strong> <strong>Regional</strong> & <strong>Local</strong> <strong>Governments</strong> – 3<br />
(25 January 06)<br />
Hungary – A1<br />
City of Budapest<br />
Bulgaria – Ba1<br />
City of Varna<br />
City of Pazardjik<br />
A3<br />
B1<br />
Ba3<br />
Russia – Baa3<br />
Republic of Bashkortostan<br />
Republic of Komi<br />
City of Moscow<br />
Oblast of Moscow<br />
Oblast of Perm<br />
City of St Petersburg<br />
Republic of Sakha<br />
Oblast of Samara<br />
Republic of Tatarstan<br />
Ba1<br />
Ba3<br />
Baa2<br />
Ba3<br />
Ba1<br />
Baa2<br />
Caa3<br />
Ba2<br />
Ba1<br />
Czech Republic – A1<br />
City of Brno<br />
Moravian-Silesian Region<br />
City of Ostrava<br />
City of Prague<br />
A3<br />
A3<br />
A3<br />
A2<br />
Kazakhstan – Baa3<br />
City of Almaty<br />
City of Astana<br />
Ba1<br />
Ba1<br />
Pol<strong>and</strong> – A2<br />
City of Poznan<br />
Baa1<br />
Ukraine – B1<br />
City of Kyiv<br />
City of Kharkiv<br />
B2<br />
B2<br />
Croatia – Baa3<br />
City of Zagreb<br />
Baa3<br />
Turkey – B1<br />
Metropolitan Municipality of Istanbul B1<br />
24
Moody’s Contacts<br />
Alex<strong>and</strong>er Ievlev – Business Development Officer, EMEA<br />
Tel: +44(0) 20 7772 8754<br />
E-mail: alex<strong>and</strong>er.ievlev@moodys.com<br />
Larissa Malycheva – Senior Vice-President,<br />
Head of Business Development, EMEA<br />
Tel: +44(0) 20 7772 5590<br />
E-mail: larissa.malycheva@moodys.com<br />
25
Moody’s Investors Service<br />
Thank You <strong>for</strong> Your<br />
Attention<br />
Q&A<br />
26
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