Aberdeen City Council’s credit outlook has been downgraded to “negative” in the wake of turmoil in the UK economy.
Ratings agency Moody’s said the change was made because the recent “weakening” of the country’s economy would cut council revenues and lead to “higher spending pressures”.
The local authority’s actual credit rating remains unchanged at “A1”.
Aberdeen City Council became the first such authority in Scotland to get a credit rating after it issued bonds of £370 million on the London Stock Exchange (LSE) in 2016.
The move helped raise funds for major building projects in the Granite City, such as The Event Complex Aberdeen venue.
Aberdeen’s rating is closely linked to the assessment of the UK’s finances.
Moody’s changed the UK’s outlook from “stable” to “negative” a week ago and has now taken the same action for Aberdeen City Council and five other local authorities.
Why are credit ratings important?
If the council’s credit rating was to fall, the liquidity of the bonds would drop and bondholders could call a meeting to assess the council’s financial position.
In a situation where the rating drops three notches below the UK’s, the bondholders can
demand repayment of the bonds – making it harder for the council to access finance.
The city council’s rating started at “Aa2” in 2016, dropping to “Aa3” the following year, and then falling again to “A1” in 2020.
Its outlook was initially “negative” but improved to “stable” in 2017, before going back to “negative” in 2019.
It recovered to “stable” in October 2020 but has now fallen again.
Uncertainty
The move comes as the Westminster government attempts to plug a multibillion pound budget blackhole.
Moody’s said: “The negative outlooks reflect the weakening national economic and fiscal environment which will lead to lower revenue collection and higher spending pressures for local authorities.
“Slower economic growth will result in lower income from business rates tax receipts, fees, sales, and rents, including rents on commercial property.
“Simultaneously a weaker economy will drive higher demand for services, especially housing and children’s social care.
“The negative outlook also reflects policy uncertainty and a risk that local authority government funding is reduced in real terms in the government’s efforts to reduce its fiscal deficit.”
However, it said the council’s credit rating would remain unchanged because of “the strengths of the sector”.
These included a low liquidity risk due to the availability of finance from the Treasury’s Public Works Loan Board, and a strong framework which requires local authorities to balance their books.
A city council spokesman said: “The announcement about Aberdeen City Council’s credit rating comes as a direct result of the assessment Moody’s have made of the UK Sovereign position last week.
“The fact that the council credit rating has a strong connection to the UK rating means that changes at the UK level have an impact on us.
“Similar downgrading of the UK credit rating was experienced in September 2017, November 2019 and October 2020, which impacted on our rating, and we remain one grade below UK Sovereign.
“The annual review of our credit rating is planned for December, and the outcome of this will be reported to finance and resources committee.
“There is no impact on council finances as a result of the change made this week by Moody’s”.
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