Increasing debt levels at the Dunedin City Council have
sparked negative attention from international credit rating
agency Standard & Poor's.
S&P yesterday issued a negative financial outlook
revision on the Dunedin City Council, raising concerns over
its ability to meet financial targets outlined in its
recently completed long-term plan.
The decision follows last week's confirmation the Office of
the Auditor-general is to investigate the council's
subsidiary Delta over its Central Otago land purchases in
2008 and 2009.
S&P yesterday confirmed the DCC group credit rating would
remain at AA long term and A-1+ in the short term and put
Dunedin on negative credit watch.
There was a one-in-three chance of a downgrade within the
next two years.
S&P credit analyst Anthony Walker said the finding could
put "further downward pressure" on future ratings.
Dunedin Mayor Dave Cull said in a statement the council was
up to the challenge of continued financial belt-tightening.
It was not a downgrade, but the agency had made it clear the
council needed to follow through with its tough financial
targets, Mr Cull said.
Prospective lenders gauge their interest rates on the risks
outlined by any, or all, of the three major rating agencies,
S&P, Moodys and Fitch.
The decision "has not come as a surprise, given council debt
levels, but it ensures we are even more firmly focused on
achieving or improving the forecasts in our long-term plan",
Mr Cull said.
The revised S&P outlook was not expected to increase the
council's borrowing costs, he said.
While a downgrade to an A rating could prompt increased
interest of 25 basis points, or a quarter of a percent,
financial service sources believe the council could face up
to a 10-basis-point rise in interest charges, the equivalent
of a 10c per $100 borrowed on renegotiated or new borrowings.
Overall council debt stands at more than $616 million.
In its long-term plan, adopted in June, the council approved
an increase in the city's debt by $59.6 million during
2012-13, largely to pay for the upgrades of the Dunedin
Centre, Tahuna wastewater plant, Toitu Otago Settlers Museum
and Logan Park redevelopment.
All the loans were expected to be borrowed from Dunedin City
Treasury at 7% interest.
During 2012-13, about $17 million of debt would be repaid,
leaving the council's gross debt levels at $274.5 million,
but still well above its self-imposed target of $200 million.
Mr Walker said the negative outlook, and possibility of a
downgrade, was based on S&P's view Dunedin may not
achieve its financial targets outlined in its long-term plan,
as its account deficits were not improving as quickly as
"If this scenario were to materialise, we consider that
Dunedin would have limited budgetary flexibility to improve
its financial position without deferring asset renewals,
which may lead to future infrastructure backlogs," he said.
In budget terms, the council had "limited room to manoeuvre",
which was reinforced in the long-term plan, and which
includes clear limits on borrowing, Mr Cull said.
"The challenge of servicing debt and maintaining services
within rate rise limits of 4% in the coming year and 3% the
year after is already recognised.
"Through cost-cutting measures and reduced capital spending,
the DCC is already addressing the issues identified by
S&P," he said.
Council subsidiary, infrastructure company Delta, bought
subdivisions in Luggate in 2008 and Jacks Point near
Queenstown in 2009, but the investments became the core of a
recent $9 million writedown of investment value, which in
turn contributed to Dunedin City Holdings Ltd booking a $5
million loss for the year to June.
Mr Walker said depending on the Auditor-general's
investigation, the outcome "may weaken our assessment" of
Dunedin's management of its council-controlled companies and
"further downward pressure could be placed on the ratings".
On the issue of council subsidiary companies, Mr Cull said
recent governance changes meant those companies "are now more
The council's ratings could be revised back to stable if the
council's budgetary performance strengthens as it forecasts,
specifically if the council achieves after-capital account
deficits of about 2% of consolidated operating revenues in
2014 and beyond, while maintaining its budgetary flexibility,
and a stable political setting, Mr Walker said.
Council chief executive Paul Orders said in the statement he
was confident staff would deliver a draft budget for 2013-14
within the long-term plan limits, based on finding
"significant savings and operational efficiencies".
Last month's annual report figures, on the council and its
companies, revealed debt had risen to $616 million for the
year to June, including more than $216 million in core debt,
including the Toitu Settlers Museum, Tahuna and Town Hall
projects. Overall debt included $146.6 million now held by
Dunedin Venues Ltd against Forsyth Barr Stadium.
While S&P had a "very positive view" of Dunedin's
financial management and the council's "modest contingent
liabilities", those strengths were "partially offset" by
Dunedin's high debt burden relative to international peers,
and its low debt-servicing ratio, Mr Walker said.