Research: Rating Action: Moody’s affirms German regions’ ratings, maintains negative outlook for Brandenburg and stable outlooks for remaining regions
- EU Regulation
- August 19, 2022
- No Comment
Frankfurt am Main, August 19, 2022 — Moody’s Investors Service (Moody’s) has today affirmed the baseline credit assessments (BCA) and ratings of six German regions (Länder). At the same time, Moody’s maintained the negative outlook on the ratings for the Land Brandenburg and the stable outlooks for the remaining five entities.
The action includes the Free State of Bavaria´s Aaa long-term issuer rating; the Land of Baden-Wuerttemberg´s Aaa long-term issuer rating; the Land Brandenburg´s Aaa long-term issuer rating, the Aaa senior unsecured debt ratings and the (P)Aaa senior unsecured MTN program rating; the Land of Saxony-Anhalt´s Aa1 senior unsecured debt ratings and (P)Aa1 senior unsecured MTN program rating; the Land of Berlin´s Aa1 long-term issuer and senior unsecured debt ratings; and Land of Nordrhein-Westfalen´s long-term Aa1 issuer rating, the Aa1 senior unsecured debt rating and (P)Aa1 senior unsecured MTN program rating.
Moody’s has also affirmed the Other Short Term (P)P-1 rating of Nordrhein-Westfalen and Saxony-Anhalt, as well as Saxony-Anhalt’s Commercial Paper P-1 rating.
The affirmation of the six German region’s ratings reflects Moody’s expectation that the credit metrics of these regions will remain consistent with their current ratings in the medium term. In particular, while the forthcoming period of slowing growth and high inflation will have a negative impact on the regions’ credit profiles, they have a long track record demonstrating their capacity to regain very strong financial metrics as soon as the worst of an economic shock passes. Over the medium term, Moody’s expects the gradual decline in debt burdens for the regions to resume.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468831 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATIONALE FOR RATINGS AFFIRMATION
Moody’s decision to affirm the BCAs and ratings for the Free State of Bavaria, Land of Baden-Wuerttemberg, Land Brandenburg, Land of Saxony-Anhalt, Land of Berlin and Land of Nordrhein-Westfalen, reflects their strong fiscal performance despite the negative effects of the pandemic which supports the view that their credit profile will prove resilient to the current unfolding shock with slowing GDP growth and high inflation.
In Moody’s view, the deficits of these Länder are well-controlled and their debt levels, although increasing in 2020 and 2021, are expected to remain manageable and consistent with their current rating levels. In the near term, the regions benefit from ongoing GDP growth, contributing to growth in tax revenue collection and improving fiscal balances. Later this year and onto next year, slowing growth and cost pressure will weigh on fiscal metrics but any increase in the debt burdens is likely to be limited by the country’s institutional arrangements and the Länder’s commitments to maintain prudent fiscal management.
At the same time, these regions benefit from unquestionable market access and low interest payments (representing about 2% of operating revenue on average expected for 2022). Moreover, their prudent debt management practices reflected by relatively long maturities and low-to-moderate financing requirements will limit the impact of current rising interest rates. Further some 80% of the regions´ outstanding direct debt was contracted at fixed interest rates at year-end 2021.
While risks are skewed to the downside as growth may slow more sharply and/or inflation rise more significantly than Moody’s currently expects, the regions are generally resilient to a more severe shock see below some considerations specific to Brandenburg. Through the previous cycles, German Länder have demonstrated their ability to mitigate pressure through their economic strength and strong institutional framework and governance. Moreover, the sovereign retains significant fiscal capacity to deliver support that would reduce the impact on the regions’ economies and, in turn, their financial metrics.
The Aaa ratings of the Free State of Bavaria (BCA: aaa), Land of Baden-Wuerttemberg (BCA: aa1), and Land Brandenburg (BCA: aa2) and the Aa1 ratings of the Land of Saxony-Anhalt (BCA: aa3), Land of Berlin (BCA: aa3) and Land of Nordrhein-Westfalen (BCA: aa3) reflect the combination of their BCA, and Moody’s assumption of a very high likelihood of extraordinary support from the Government of Germany.
The Free State of Bavaria’s rating affirmation reflects its diversified and strong (18% above national average) economy, which positions the state well to attract individuals and companies. Its excellent track record of budgetary management contributes to achieve good financial performance with continuous positive operating results even in challenging years, like in the recent pandemic. Overall, including capital expense, Moody’s expects balanced financials from 2022 and potentially a slight surplus in the following years. The management’s strong commitment to become debt free contributes to it maintaining a moderate debt burden with net direct and indirect debt (NDID) below 50% of operating revenue. In the absence of a further escalation in the current economic shock, Bavaria’s debt burden is likely to resume a downward trend from 2023.
The Land of Baden-Wuerttemberg´s rating affirmation reflects solid financial performance over the next two years, with modest debt levels, that increased to 96% in 2020, but decreased to 76% in 2021, below pre-pandemic levels. The Gross Operating Balances (GOB) strengthened to 8% of operating revenues, reverting to levels similar to pre-pandemic, after a dip to 1% in 2020. As a baseline, Moody’s expects slowly decreasing debt levels from 2022 on due to a financing surplus. Baden-Wuerttemberg´s rating also reflects its strong and diversified regional economy and strong institutional framework.
The Land Brandenburg´s rating affirmation reflects strong governance and management which helped to improve its fiscal position quicker than Moody’s previously expected, after some weakening in 2019-20 (not related to the pandemic). Taking into account Moody’s current growth and inflation expectations for Germany, the Land’s financial results are likely to improve further in the next few years. Over time, the Land’s geographic location around the capital city Berlin, positions Brandenburg to benefit from positive economic and demographic effects and to remain attractive for individuals or corporations. The Land also has very low contingent liabilities compared to all other German Länder. However, Brandenburg’s debt burden (NDID as a % of operating revenue) will remain high, between 160% to 180% of operating revenue over the coming three years. Brandenburg´s rating also reflects the supportive federal equalization system.
The Land of Saxony-Anhalt´s rating affirmation reflects the supportive federal equalization system, but also the Land’s strong governance and management practices and its excellent market access including the use of a commercial paper program. The rating also takes into account the very high debt level, which is likely to peak at NDID of 200% of operating revenue in 2022. In 2021, the Land reported a significant deficit due to for the inclusion of a special fund to finance pandemic related cost. With this fund non-recurring, for 2022 and following two years, Moody’s expects that the Land can achieve balanced financial results.
The Land of Berlin’s rating affirmation reflects solid financial performance, despite the impact of the pandemic – with return to balanced budgets expected in 2023. These positives are counterbalanced by Berlin’s high debt and limited financial flexibility. Despite the positive long track record of steadily declining debt, NDID as a percentage of operating revenues remains very high at 198% (2021). GOB remained positive also during the pandemic, though below the very strong double-digit levels recorded prior to the pandemic. Moody’s expects GOB will remain sufficient to meet capital expenditures and support broadly stable or gradually declining debt levels from 2023 onwards. Berlin´s ratings also reflects its strong institutional framework and dynamic economy.
The Land of Nordrhein-Westfalen’s ratings reflect its well diversified and strong regional economy as well as its excellent market access and sound debt management. Very high debt levels (204% of operating revenues in 2021) are likely to decline gradually in the medium term, backed by strong GOB and a financing surplus. The affirmation of the other short-term rating of (P)P-1 reflects the region’s excellent liquidity profile, unquestioned market access and Moody’s expectation that it will continue to be very robust in the following two years, with significant cash on hand and limited short-term debt.
RATIONALE FOR STABLE OUTLOOKS
The stable outlook of the five regions reflects Moody’s view that the regions’ credit metrics will remain consistent with their current ratings. In case of a deeper and longer economic shock than currently expected, strong institutions and governance at the Laender and national levels are likely to foster resilience and contribute to a prompt resumption of strong financial positions.
RATIONALE FOR BRANDENBURG’S NEGATIVE OUTLOOK
Brandenburg´s negative outlook reflects Moody’s view that Brandenburg continues to compare relatively weaker than its Aaa-rated German peers which, in the face of a renewed economic shock, may undermine the resilience of its credit profile to downside risks. Moody’s expects the Land to post the weakest gross operating balance (GOB) of the Aaa-rated German peers and a debt burden well above 160% of operating revenue. Should the current headwind from geopolitical and economic risk result in slower than expected economic growth, in combination with higher inflation, Brandenburg’s fiscal health may be undermined more significantly than that of other Aaa-rated regions.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
The Free State of Bavaria’s and the Land of Baden-Wuerttemberg’s ESG Credit Impact Score is positive (CIS-1), reflecting neutral-to-low exposure to environmental and social risk, along with very strong governance and policy effectiveness that mitigate the region’s susceptibility to these risks.
The Land Brandenburg’s, the Land of Saxony-Anhalt’s, the Land of Berlin´s and the Land of Nordrhein-Westfalen’s ESG Credit Impact Score is neutral-to-low (CIS-2), reflecting neutral-to-low exposure to environmental and moderately negative social risk for Brandenburg and Saxony-Anhalt, while Berlin and Nordrhein-Westfalen´s social risk score is neutral-to-low. For all regions the very strong governance and policy effectiveness mitigates the susceptibility to these risks.
The six regions’ environmental issuer profile score is neutral-to-low (E-2), reflecting neutral-to-low risks for all environmental factors, except for Land of Nordrhein-Westfalen that scores moderately negative for sub-factor Physical Climate Risk.
Free State of Bavaria´s and Land of Baden-Wuerttemberg’s neutral-to-low social issuer profile score (S-2) reflects broadly neutral-to-low risks from most social factors. Demographic risks arise due to an ageing population trend, resulting in both long-term economic (declining labour supply reducing revenues) and expenditure (increasing pension and other social costs) pressures. The regions have strong labour and income, with relatively low unemployment levels as well as overall solid and good access to basic services and housing, leading to neutral-to-low risks on these scores.
Land Brandenburg´s and Land of Saxony-Anhalt’s moderately negative social issuer profile scores (S-3) are primarily driven by demographic risks, which are greater than in other regions, as well as labour and income risks. Despite somewhat benefiting from migration inflows from neighboring Berlin, the Land Brandenburg similar to Saxony-Anhalt – has overall long-term adverse demographics with migration and age structure weaker than for Germany overall. An ageing population, which will lead to economic (declining labour supply reducing revenues) and expenditure (higher pension and other social costs) pressures, is the main social risk.
Land of Berlin´s and Land of Nordrhein-Westfalen’s neutral-to-low social issuer profile scores (S-2) reflects broadly neutral-to-low risks from most social factors, other than health and safety (which scores positive), housing (which scores moderately negative). Unlike the other regions, housing presents increased risk for Berlin, typical for larger cities which face growing population and as is the case for Berlin a somewhat weaker socio-economic profile of its population, leading to less housing affordability. Demographic risk is neutral-to-low for Berlin reflecting the immigration of young population into the city which mitigates some of the pressure driven by the overall aging trend, resulting in declining labour supply and higher pension and social cost.
The positive governance issuer profile score (G-1) for all six German regions reflects the very strong national institutional and governance framework. Institutional structure is strong and characterised by very effective “consensus-oriented” interactions among the regions. A very strong equalization systems largely evens out fiscal disparities, mainly on the revenue side, but limits individual states’ financial flexibility. Stringent fiscal rules (e.g. debt brake, enshrined in German constitution) are in place and constantly monitored. Fiscal policy is overall prudent and well coordinated among different layers of government. Budgeting occurs in compliance with fiscal rule, is transparent and typically conservative, so that budget plans are typically met. External monitoring of budget plans and budget execution is carried out by a specific stability council (Stabilitätsrat). Each region produces timely, accurate and transparent financial statements and a legal requirement forces to have multi-year financial planning of minimum 5 years.
The specific economic indicators, as required by EU regulation, are not available for these six regions. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.
Sovereign Issuer: Germany, Government of
GDP per capita (PPP basis, US$): 58,378 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 2.6% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.7% (2021)
Gen. Gov. Financial Balance/GDP: -3.6% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 7.4% (2021) (also known as External Balance)
External debt/GDP: 163% (2021)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 17 August 2022, a rating committee was called to discuss the rating of the Baden-Wuerttemberg, Land of; Bavaria, Free State of; Berlin, Land of; Brandenburg, Land; Nordrhein-Westfalen, Land of; Saxony-Anhalt, Land of. Other views raised included: The issuers’ economic fundamentals, including its economic strength, have not materially changed. The issuers’ institutions and governance strength, have not materially changed. The issuers’ fiscal or financial strength, including its debt profile, has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings of Bavaria, Baden-Wuerttemberg and Brandenburg are Aaa and cannot be upgraded.
An upgrade of Land of Saxony-Anhalt, Land of Berlin or Land of Nordrhein-Westfalen would be likely should their debt burdens decline substantially.
Downward pressure on the ratings for the regions could occur if fiscal performance and debt burdens deviated materially and durably from Moody’s current projections. This could occur should economic growth deteriorate sharply and any of the regions was unable to contain the medium-term implications on its fiscal balances and debt burdens. In addition, a downgrade of the sovereign rating, or any indication of weakening government support, would likely lead to a downgrade of these six regions´ ratings.
The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468831 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody’s disclosures on the following items:
EU Endorsement Status
UK Endorsement Status
Participation: Access to Management
Participation: Access to Internal Documents
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The below contact information is provided for information purposes only. For disclosures on the lead rating analyst and the Moody’s legal entity that issued the rating, please see the issuer/deal page on https://ratings.moodys.com for each of the ratings covered.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
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Client Service: 44 20 7772 5454