OREANDA-NEWS. June 09, 2015. Fitch Ratings has affirmed the London Borough of Wandsworth's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA+' with Stable Outlooks and Short-term foreign currency IDR at 'F1+'.

The ratings reflect Wandsworth's strong socio-economic profile, the strong institutional framework of the UK, and the borough's strong track record of focused financial management, which includes conservative budgeting, prudent investment policies and its low level of debt. However, Wandsworth also has limited flexibility to raise revenue and a low operating margin. The Stable Outlook reflects Fitch's view that its performance will be stable, with debt slightly declining over time.

KEY RATING DRIVERS
Fitch considers that UK local authorities (LAs) are highly dependent on central government transfers, and have limited tax-setting powers. They are able to increase council tax and, since April 2013, have been entitled to a share of increase in certain locally collected rates. The distribution of revenue-support grants and the share of business rates top-up is based on a specific formula, which takes into account the economic and financial strengths of the LAs.

Wandsworth is a London borough located in the western part of inner/central London with an estimated population of over 307,000. The local economy is driven by a strong services sector, with a significant number of people working in public administration finance and IT, or commuting daily to central London, which helps to sustain wealth levels. Wandsworth benefits from a strong socio-economic profile, with a high employment rate at 76% and average salaries above the London average.

Wandsworth reported a sound surplus before net financing over total revenues of 11% in the fiscal year to March 2014 (FYE14), in line with 2013 results and above the levels of previous years. In our base case scenario, we expect Wandsworth to report moderate surpluses averaging GBP50m over the medium term. Spending totalled GBP828m with a large part dedicated to social housing. Wandsworth manages a stock of 32,000 residential properties with housing revenue at about GPB140m.

At FYE15, Wandsworth's total debt was GBP181m. The council began reducing debt in FY13 after it made use of a new loan contracted with the Public Works Loan Board, partly funding the Housing Revenue Account subsidy buy-out. Debt is expected to decline in line with the amortisation schedule. Wandsworth's short-term investment portfolio grew considerably to GBP473m at FYE15 and can be used at any time to cover potential shortfalls. As per the last actuarial valuation, Wandsworth's pension fund obligations were 95%-funded.

RATING SENSITIVITIES
A downgrade could be triggered by a negative trend in operating performance, increase of debt beyond Fitch's expectations and a failure to consistently and sufficiently cover debt service by the operating balance. Given the limited revenue flexibility of LAs in the UK, the rating is also sensitive to any negative change in the central government grants scheme, particularly in the context of Wandsworth's tight operating margin.

Continued prudent management and budgetary performance in line with the average over the past five years would trigger an upgrade, providing there is also an upgrade of the sovereign.