Standard and Poors changes Auckland City's outlook to negative

Standard & Poor's has changed Auckland City Council's outlook from stable to negative because of the region's Super City plans.

The credit-ratings agency has affirmed the city's AA/A-1+ local currency rating, which allows it to borrow money on more favourable terms than would otherwise be possible.

But the agency has revised the outlook to negative, from stable, in light of the city's likely merger with seven other councils to form the Auckland Council.

All assets and liabilities of the existing councils are likely to be transferred to a newly constituted council before the October 2010 local elections, the agency says.

A Herald survey in January showed the Super City would inherit more than $3 billion in debt owed by Auckland City and the other councils on behalf of half a million ratepayers.

This liability is against $28 billion of accumulated assets of the combined councils as estimated by Waitakere City Council finance officers.

Standard & Poor's credit analyst Anna Hughes said the rating could be downgraded or the outlook returned to stable when there was more certainty about the likely credit quality of the merged councils.

Ms Hughes said Auckland City's rating was based on its strong cash-operating surplus, low-risk operations and a large local economy.

However, the city's large capital spending programme and the resulting rise in debt somewhat offset these strengths.

Auckland City Council finance chairman Doug Armstrong said the revised negative outlook did not adequately reflect the benefits of merging the councils.

The new council would continue with a policy of a strong cash operating surplus and low risk.

Its rating base would be three times the size of Auckland City Council's.

Mr Armstrong said he did not expect the revised rating to affect the cost of borrowing for next year's $494 million city capital programme.

Auckland City's draft budget shows total borrowings of $720 million against revenue of $623 million and total assets of $10.7 billion.

The prospect of a merger of councils has helped the credit rating of a fierce critic of the Government's reforms - Waitakere City Council.

Waitakere is one of a handful of councils in the country that have a credit rating by Standard & Poor's, with the aim of being able to attract investors at lower interest rates.

Last December the agency revised the council's outlook to negative. Now, it has affirmed an A+A/A-1 rating and revised the outlook to positive.

In the agency's assessment the credit quality of the merged councils may be stronger than that of Waitakere City, which faces $526 million of debt next year and $629 million the year after.

The council's projected revenue next year is $273 million against assets of $2.2 billion and total income of $273 million.

*This article initially incorrectly stated that the council's credit rating had been changed.