Swiss Canton of Zurich 'AAA' Rating Affirmed; Outlook Stable - Amazon AWS
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Research Update:
Swiss Canton of Zurich 'AAA' Rating
Affirmed; Outlook Stable
Primary Credit Analyst:
Sabine Daehn, Frankfurt (49) 69-33-999-244; sabine.daehn@standardandpoors.com
Secondary Contact:
Thomas Fischinger, Frankfurt (49) 69-33-999-243; thomas.fischinger@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Ratings Score Snapshot
Key Sovereign Statistics
Related Criteria And Research
Ratings List
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1372133 | 300149949Research Update:
Swiss Canton of Zurich 'AAA' Rating Affirmed;
Outlook Stable
Overview
• The Swiss Canton of Zurich benefits from a very strong economy and exceptional
liquidity.
• We believe the canton will maintain a low debt burden.
• We are affirming our 'AAA' rating on Zurich.
• The stable outlook reflects our view that the canton's management will remain
committed to consolidating the budget and stabilizing budgetary performance over
our forecast horizon of 2014-2016, and beyond.
Rating Action
On Nov. 28, 2014, Standard & Poor's Ratings Services affirmed its 'AAA' long-term
issuer credit rating on the Swiss Canton of Zurich. The outlook remains stable.
Rationale
The rating reflects our view of the canton's very strong and diversified economy, as
well as Switzerland's extremely predictable and supportive institutional framework,
in which Zurich contributes to the equalization system. Zurich displays exceptional
liquidity and strong budgetary flexibility, in our view. This flexibility, combined
with very strong financial management and commitment to balancing accounts over the
medium term, should allow the canton to maintain at least average budgetary
performance. In our view, the canton's debt remains low, even considering funding
needs resulting from projected deficits after capital accounts under our base-case
scenario for 2014-2016. The ratings are, however, constrained by moderate contingent
liabilities stemming mainly from the canton's guarantee to Zuercher Kantonalbank
(ZKB). The long-term rating on Zurich is equivalent to our 'aaa' assessment of the
state's stand-alone credit profile (SACP).
In our view, Zurich has a very strong regional economy, with high wealth levels
relative to national and international peers. We estimate Zurich's GDP per capita at
about Swiss franc (CHF) 96,000 (about $100,000) in 2015. The canton is Switzerland's
financial center, and it contributes more than one-fifth of the national gross value
added. As a result, Zurich contributes the largest amount (CHF417 million) in
nominal terms to the national equalization system, about 3% of its adjusted
operating expenditures. We classify the Swiss institutional framework as extremely
predictable and supportive, owing to its strong and stable equalization system. We
expect this to remain largely unchanged over the next two to four years, even if the
central government makes changes following the recent system evaluation for 2012-
2015 and to account for revised corporate taxation rules ("Unternehmenssteuerreform
III"), likely to be implemented only after 2018.
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Some of Zurich's expenditure items, such as payments to the equalization system, are
rather inflexible. But the canton's overall budgetary flexibility is stronger than
that of most of its Swiss peers, due to a very high share of modifiable revenues.
Even though diminishing tax competition between cantons and public opposition
somewhat limit the canton's ability to raise taxes, the medium-term balancing
requirement offsets this effect, and we anticipate that the canton would use its
flexibility if needed. Nevertheless, we observe a greater focus on expenditure
management with respect to investments and operating costs. The canton continues to
prioritize investment projects, targeting an investment volume of about 80% of the
total projects proposed for the planning period 2015-2018. Overall, we continue to
view the canton's financial management as very strong, due to its approval-based
annual budgeting process and very prudent long-term planning. Zurich's strong
commitment to balancing accounts is shown by its medium-term balancing requirement,
which calls for an automatic consolidation program, if for the rolling eight-year
period of four previous and four future years the accounts do not balance.
Still, we have observed some slippage and expect the canton's average budgetary
performance to weaken over the next three years. Zurich's results for 2014 are
likely to weaken compared with those in 2013, owing to lower tax revenue growth and
no dividend from the Swiss National Bank, which have been counterbalanced by
spending adjustments during the year. However, we do not see the canton's ongoing
cost-cutting measures over our 2014-2016 forecast period as sufficient to achieve
balanced budgets after capital accounts by 2016. We expect the operating balance to
stay consistently lower than 5% of adjusted operating revenues over the next three
years, as it has done since 2012. Consequently, we forecast it at about 2.6% of
operating revenues over 2012-2016, a slight decrease compared with our base case in
May 2014.
Our calculation of the canton's budgetary figures for 2013 includes the CHF2 billion
capital injection into its pension fund as capital expenditure. This results in an
exceptionally large one-time deficit after capital accounts in 2013. Excluding this
item and looking at the coming years, we estimate Zurich's deficit after capital
accounts to fluctuate at about 4% of adjusted total revenues, while currently the
five-year average is still at about negative 6%.
Several factors have contributed to this weaker budgetary trend since 2011, among
them are the impact of Switzerland's hospital funding reform and lower tax revenue
growth. Zurich's recapitalization of the pension fund that resulted in a provision
of CHF2.6 billion in 2011 (which we exclude as a non-cash item) has also hampered
its budgetary performance. Still, we include the annual pension fund consolidation
contributions as a cash-relevant expense item and the cash injection in 2013, which
therefore affect budgetary performance. Overall, these factors support our base-case
assumption of currently only average budgetary performance for Zurich.
Zurich's nominal debt has increased substantially, due to the CHF2 billion pension
fund contribution in 2013, although part of the funding for this was obtained in
2012. We expect nominal debt to rise further, considering projected deficits after
capital accounts. However, we forecast that the canton's tax-supported debt will
remain low, at about 40% of consolidated operating revenues by 2016, depending on
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its use of liquidity reserves and conditions in capital markets. This estimate does
not include the canton's contribution of endowment capital ("Dotationskapital") to
ZKB because the timing is uncertain. If Zurich makes this contribution, however, it
would only increase its debt burden by about 3.5% of consolidated operating
revenues. Due to the pension fund's very high coverage ratio, we regard Zurich's
unfunded pension liabilities as limited.
The canton has provided a legal guarantee for practically all of ZKB's liabilities.
The rating on the canton would be put under pressure if ZKB were to call on the
guarantee or rely on the canton for an additional considerable capital injection. We
currently view the likelihood of this occurring as very low, given the bank's strong
stand-alone credit profile of 'aa-'. Consequently, we assess the canton's contingent
liabilities as moderate.
Liquidity
We view Zurich's liquidity as exceptional. Our assessment takes into account the
canton's very high cash reserves and strong access to Switzerland's deep and liquid
capital market.
The canton's average available liquid assets over the past four quarters totaled
about CHF1.5 billion. This amount is more than sufficient to cover debt service of
CHF360 million (principal and interest) in 2015, even taking into account projected
budgeted deficits. Over our forecast period, we assume that the amount of liquid
assets will likely reduce because some of it will go toward covering deficits after
capital accounts. Additionally, the canton has access to a committed bank line of
CHF400 million.
In our view, the canton has highly predictable cash flows, which form the basis of
its liquidity planning. Yearly interest payments are low and stable at about 1% of
operating revenues. Debt service, however, fluctuates with CHF225 million in debt
maturing in 2015 and the next sizable maturities, CHF1.2 billion, due in 2017.
Zurich plans for a minimum cash position of about CHF500 million, slightly below 4%
of operating expenditures.
We factor our view of the canton's access to external liquidity as strong into our
assessment of its liquidity. This is in line with our favorable view of
Switzerland's banking sector (see "Banking Industry Country Risk Assessment:
Switzerland," published Dec. 6, 2013, on RatingsDirect).
Outlook
The stable outlook reflects our view that the canton's management will remain
committed to consolidating the budget and stabilizing budgetary performance over our
forecast horizon of 2014-2016, and beyond. Furthermore, in our base-case scenario
for that period, we forecast Zurich's deficit after capital accounts will stabilize
above 5% of adjusted total revenues and that debt levels will not deviate
substantially from about 40% of operating revenues.
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1372133 | 300149949Research Update: Swiss Canton of Zurich 'AAA' Rating Affirmed; Outlook Stable
We could lower the rating if Zurich's fiscal performance deteriorated substantially,
resulting in operating deficits, and deficits after capital accounts larger than 5%
of total adjusted revenues on average. In addition to signaling a weakening of
managerial strength, such deficits could lead to a significant increase of debt
above 60% of consolidated operating revenues. However, we currently consider this
scenario to be unlikely.
Key Statistics
Table 1
Canton of Zurich Financial Statistics
--Fiscal year end Dec. 31--
(Mil. CHF) 2011 2012 2013 2014bc 2015bc 2016bc
Operating revenues 13,318 13,500 13,440 13,459 13,903 14,269
Operating expenditures 11,873 12,956 12,995 13,236 13,677 13,953
Operating balance 1,445 544 445 223 226 316
Operating balance (% of operating revenues) 10.8 4.0 3.3 1.7 1.6 2.2
Capital revenues 113 145 51 37 24 48
Capital expenditures 897 802 2,853 847 778 849
Balance after capital accounts 661 (113) (2,357) (587) (528) (485)
Balance after capital accounts (% of total revenues) 4.9 (0.8) (17.5) (4.3) (3.8) (3.4)
Debt repaid 50 50 700 1,000 225 500
Balance after debt repayment and onlending 646 (38) (2,858) (1,535) (703) (964)
Balance after debt repayment and onlending (% of total revenues) 4.8 (0.3) (21.2) (11.4) (5.0) (6.7)
Gross borrowings 0 1,000 1,464 1,000 500 750
Balance after borrowings 646 962 (1,394) (535) (203) (214)
Operating revenue growth (%) 4.8 1.4 (0.4) 0.1 3.3 2.6
Operating expenditure growth (%) 3.4 9.1 0.3 1.9 3.3 2.0
Modifiable revenues (% of operating revenues) 77.3 74.6 73.4 74.2 73.2 73.2
Capital expenditures (% of total expenditures) 7.0 5.8 18.0 6.0 5.4 5.7
Direct debt (outstanding at year-end) 3,350 4,300 5,064 5,064 5,339 5,589
Direct debt (% of operating revenues) 25.2 31.9 37.7 37.6 38.4 39.2
Tax-supported debt (% of consolidated operating revenues) 25.3 32.0 37.8 37.8 38.5 39.3
Interest (% of operating revenues) 1.6 1.6 1.2 1.0 1.0 1.0
Debt service (% of operating revenues) 2.0 2.0 6.4 8.5 2.6 4.5
The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting
Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are
the financial statements and budgets, as provided by the issuer. bc--Base case reflects Standard & Poor's expectations of the most likely scenario.
CHF--Swiss franc.
Table 2
Canton of Zurich Economic Statistics
--Fiscal year end Dec. 31--
(Mil. CHF) 2011 2012 2013 2014bc 2015bc 2016bc
Population 1,392,400 1,408,600 1,425,105 1,439,350 1,453,750 1,468,285
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Table 2
Canton of Zurich Economic Statistics (cont.)
--Fiscal year end Dec. 31--
(Mil. CHF) 2011 2012 2013 2014bc 2015bc 2016bc
Population growth (%) 1.4 1.2 1.2 1.0 1.0 1.0
GDP per capita (CHF) 92,553 92,645 93,200 93,945 95,825 97,835
Unemployment rate (%) 2.90 3.00 3.20 3.30 N/A N/A
The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting
Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources typically
include national statistical offices, Eurostat, and Experian Ltd. bc--Base case reflects Standard & Poor's expectations of the most likely scenario.
CHF--Swiss franc. N/A--Not applicable.
Ratings Score Snapshot
Table 3
Canton of Zurich Ratings Score Snapshot
Key rating factors
Institutional framework Extremely predictable and supportive
Economy Very strong
Financial management Very strong
Budgetary flexibility Strong
Budgetary performance Average
Liquidity Exceptional
Debt burden Low
Contingent liabilities Moderate
*Standard & Poor's ratings on local and regional governments (LRGs) are based on eight main rating factors listed in the table above. Section A of
Standard & Poor's "Methodology For Rating Non-U.S. Local And Regional Governments" summarizes how the eight factors are combined to derive
the foreign currency rating on an LRG.
Key Sovereign Statistics
Swiss Confederation 'AAA/A-1+' Ratings Affirmed; Outlook Stable, Nov. 21, 2014
Related Criteria And Research
• Criteria - Governments - International Public Finance: Methodology For Rating Non-
Related Criteria
U.S. Local And Regional Governments - June 30, 2014
• Criteria - Governments - International Public Finance: Methodology And Assumptions
For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related
Entities And For Rating Their Commercial Paper Programs - October 15, 2009
• Banking Industry Country Risk Assessment: Switzerland, Dec. 6, 2013
Related Research
• Public Finance System Overview: Swiss Cantons, July 30 2009,
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1372133 | 300149949Research Update: Swiss Canton of Zurich 'AAA' Rating Affirmed; Outlook Stable
In accordance with our relevant policies and procedures, the Rating Committee was
composed of analysts that are qualified to vote in the committee, with sufficient
experience to convey the appropriate level of knowledge and understanding of the
methodology applicable (see 'Related Criteria And Research'). At the onset of the
committee, the chair confirmed that the information provided to the Rating Committee
by the primary analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the recommendation, the
Committee discussed key rating factors and critical issues in accordance with the
relevant criteria. Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected in the Ratings
Score Snapshot above.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the rating
committee are summarized in the above rationale and outlook. The weighting of all
rating factors is described in the methodology used in this rating action (see
'Related Criteria And Research').
Ratings List
Ratings
To From
Zurich (Canton of)
Issuer credit rating
Foreign and Local Currency AAA/Stable/-- AAA/Stable/--
Senior Unsecured
Local Currency AAA AAA
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this
rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left column.
Alternatively, call one of the following Standard & Poor's numbers: Client Support
Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-
6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495)
783-4009.
Additional Contact:
International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com
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