S&P Global Ratings cuts 18 councils' credit ratings - will their borrowing costs rise?

S&P Global Ratings is worried councils don't have enough revenue to cover all their costs, including investment in infrastructure. Photo / Alex Cairns

S&P Global Ratings has downgraded the credit ratings of 18 of the country’s local councils, and three council-controlled organisations (CCOs).

The credit rating agency is worried councils aren’t receiving enough revenue to cover rising costs, including investment in infrastructure.

“We are witnessing substantially larger cash deficits and structurally higher debt levels than we have previously seen,” S&P said on Tuesday night.

It also raised its concerns over the policy environment being “more volatile” than in the past.

“This reflects factors including the quick passage and repeal of several key laws governing local councils, the cancellation of various Crown grant programmes, an increase in unfunded mandates, and recent announcements about infrastructure financing options,” S&P said.

“These changes can materially affect councils' financial outcomes, making it difficult for S&P Global Ratings and the sector to accurately forecast financial outcomes.”

Nonetheless, the impact of the downgrades on councils’ borrowing costs will be softened by S&P being happy with the strength of the organisation that issues debt on behalf of councils – the Local Government Funding Agency (LGFA).

S&P, on Tuesday afternoon, affirmed the LGFA’s ‘AA+’ long-term foreign currency, and ‘AAA’ long-term local currency, ratings.

It said the risks associated with councils’ weakening credit quality were being countered by the LGFA’s strengthening capital position.

“LGFA’s lending portfolio has gradually become less concentrated over the past few years. This has improved the agency’s capital adequacy assessment. Smaller councils are borrowing proportionally more than the larger ones, diluting concentration,” S&P said.

“LGFA has also diversified its access to global capital markets in recent years. This supports its funding profile and strong liquidity position...

“We consider LGFA’s management and governance to be a key strength that mitigates potential risks.”

S&P said the ratings outlook for the LGFA was “stable”, because of its dominant position in the market and the high likelihood central government would support the LGFA if it ran into financial trouble.

However, S&P still saw New Zealand’s local government sector as higher risk than before.

“On February 24, 2025, we lowered the institutional framework assessment for New Zealand local governments to ‘very predictable and well-balanced’ from ‘extremely predictable and supportive’,” it said.

“The credit quality of councils could weaken further as the government and LGFA explore increasing debt limits for high-growth councils.

“The agency’s loan asset quality, on average, could also diminish if it starts lending to water CCOs with higher leverage.

“We believe these developments will generally be negative for the credit quality of the sector, which is already highly indebted by international standards.”

The councils and CCOs that had their credit ratings downgraded include: Christchurch City Council, Christchurch City Holdings, Dunedin City Council, Dunedin City Treasury, Greater Wellington Regional Council, WRC Holdings, Hamilton City Council, Hastings District Council, Hutt City Council, Kāpiti Coast District Council, Marlborough District Council, Nelson City Council, New Plymouth District Council, Palmerston North City Council, Porirua City Council, South Taranaki District Council, Tasman District Council, Taupō District Council, Waimakariri District Council, Wellington City Council, and Whanganui District Council.

Bay of Plenty Regional Council and the Western Bay of Plenty District Council maintained their ratings. The country’s smaller councils don’t have credit ratings.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.