S&P: Swiss Canton of Lucerne 'AA+/A-1+' Ratings Affirmed And Subsequently Withdrawn
We believe Vellinge has very low contingent liabilities. The municipal companysector is small, and we incorporate all of the companies' debt into our debt analysis.
We assess Vellinge's liquidity as exceptional, owing to the municipality's very strong internal liquidity and strong access to external liquidity. Specifically, Vellinge has low debt repayments in the short term, holds large cash reserves, and has what we view as strong market access.
Vellinge has expanded its treasury functions since 2011 and centralized the funding of its company sector at the municipal treasury. Over the next 12 months, we believe that Vellinge's internal liquidity will consist of cash holdings of about SEK255 million and short-term investments of SEK517 million in a pension fund. Of the total liquidity, 45% is invested in equity, 23% in bonds, and 32% in cash deposits. We believe that these short-term investments would be available as a source of liquidity at management's discretion. Consequently, we include them in our liquidity calculations, with the appropriate haircuts as outlined in our criteria.
At the same time, Vellinge's outstanding financial debt consists mainly of long-term bonds, which have an even and predictable maturity structure, with SEK150 million maturing in October 2016. We note that, as we expected, Vellinge has set up a SEK1 billion commercial paper (CP) program this year, from which it has issued SEK0.3 billion of CP. We note that Vellinge has kept about SEK0.2 billion of the issuance proceeds as a cash reserve, and we expectthat it will continue to take necessary actions to maintain exceptional liquidity coverage over the coming two years. We forecast that Vellinge's cashand liquid assets will represent 1.1x of the debt maturing over the next 12 months, including our forecast of financing needs for municipal investments. We assess Vellinge's market access as strong, which supports our view of the municipality's liquidity position.
Overall, we regard the municipality's debt management as prudent. In our base case, we assume that Vellinge will maintain the long-term nature of its loan portfolio and that its liquidity will remain exceptional over 2016-2018.
The stable outlook reflects our expectation that Vellinge's management will maintain sound budgetary performance, with surpluses after investments in 2018. In addition, we expect that Vellinge will continue to prudently manage the maturity structure of its loan portfolio to keep refinancing risk low and liquidity exceptional.
Although unlikely at this stage, we could consider lowering the rating, in line with our downside scenario, if we observed a significant deterioration ofVellinge's budgetary performance that resulted in a squeeze on liquidity. Thiscould lead us to revise our liquidity assessment downward, owing for example to the depletion of the municipality's cash holdings combined with a marked accumulation of short-term debt.