Fitch Affirms Queensland and QTC at 'AA'; Outlook Stable

(The following statement was released by the rating agency)SYDNEY, August 31 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) on Australia's State of Queensland (Queensland) and Queensland Treasury Corporation (QTC) at 'AA', and Foreign- and Local-Currency Short Term IDR at 'F1+'. The Outlooks are Stable. At the same time, Fitch has affirmed the rating on QTC's Commonwealth of Australia guaranteed outstanding senior unsecured debt at 'AAA'. A full list of ratings is at the end of this commentary.The affirmation reflects that there have been few changes since our last review in September 2015, and incorporate Australia's strong institutional framework, Queensland's improving direct debt position, sound liquidity and debt management, and the state's stronger budgetary performance. Higher sustained operating and current balances, and growing revenues will support improved debt metrics, although Fitch expects operating and current margins to remain weak relative to other 'AA'-rated international peers, which limits financial flexibility. The Stable Outlooks reflect Fitch's expectations that Queensland, supported by economic growth and its fiscal principles, will maintain an improved budgetary performance and that direct debt metrics will move closer to those of peers KEY RATING DRIVERS QueenslandAustralia's institutional framework supports Queensland's ratings. Grant income accounts for a large portion (around 46%) of Queensland's revenue, and helps offset high operating expenditure in social service areas, such as education and health. Moreover, adjustments in the distribution of goods and services tax based upon the performance of a state or territory help mitigate any potential relative financial underperformance. In addition, the Australian sovereign (AAA/Stable) has mechanisms to limit the financial impact on a state from natural catastrophes.Fitch expects Queensland's general government direct debt levels to have moved in line with those of 'AA' peers in the fiscal year ended 30 June 2016 (FY16) and to remain relatively stable over the forward estimates. The state estimates that general government direct debt was AUD36.3bn at FYE16 (FYE15: AUD43.7bn) and will be AUD39.8bn at FYE20. Our calculations, which allow for some revenue and expense slippage, result in direct debt of AUD41.0bn by FYE20. However, we estimate the ratio of general government direct debt to current (excluding on-passed grants) revenue to have improved to 76% at FYE16 due to revenue growth and the debt reduction undertaken in FY16, and forecast the ratio to be 75% at FYE20, down from 96% at FYE15. Queensland expects its real gross state product (AUD301bn at FYE15) to have increased by 3.5% in FY16, compared with 0.8% in FY15. The state forecasts gross state product to increase 4.0% in FY17. Business investment continues to decline rapidly as construction is completed on major liquefied natural gas (LNG) projects, but exports will grow strongly as LNG production ramps up. Strong dwelling investment has been supported by low interest rates, which helps offset weak household consumption as a result of low income growth. Queensland's population grew 1.2% in FY15 to 4.8 million and represents 20% of Australia's total population. The state's seasonally adjusted unemployment rate improved to 6.1% in July 2016 (July 2015: 6.5%), but was higher than the national average of 5.7%. Queensland has taken a number of strong measures over the last couple of years to improve its budgetary performance, reduce future general government debt and rebuild its financial position. We calculate a Fitch-adjusted current balance of AUD3.4bn in FY15 (up 16% yoy), and AUD3.3bn in FY16 based on the state's estimates. We believe that the state's improved operating and current balances are sustainable through to FY20. However, we have factored into our estimates further downward revisions to payroll tax and weaker royalties' revenue. Fitch expects the state to continue to run deficits before debt variation over FY16 to FY20; it has not produced a surplus before debt variation since FY06. As a result, Fitch expects any adverse variation in operating margins will result in higher debt levels than forecast by the state, if no additional offsetting actions are taken. The state's management of its debt and liquidity functions is sophisticated and conducted through QTC. QTC is the central financing authority and corporate treasury services provider for Queensland and its public-sector entities. QTC borrows domestically and internationally using a variety of debt instruments, and is the largest Australian semi-government issuer of Australian dollar-denominated bonds.The ratings also take into account Queensland's considerable contingent liabilities in QTC, as Queensland guarantees the obligations of all debt securities issued by QTC, and obligations from QTC's derivative transactions. Fitch estimates that the funds QTC raised for public-sector entities and local councils added AUD62bn (FYE15: AUD57bn) to the state's net overall risk at FYE16. This is mitigated by the fact that a large proportion of QTC's debt is self-supporting as it is raised for state-owned entities, and the AUD6bn (FYE15: AUD10bn) in investments held in excess of the state's superannuation liability.Fitch forecasts an increase in net overall risk to AUD98bn at FYE20 from AUD91bn at FYE16, although net overall risk as a ratio of current revenue will improve to 191% at FYE20 from a peak of 219% at FYE13. QTC and Debt RatingsQTC's ratings are credit-linked to those of Queensland through the state's statutory guarantee, and QTC's 100% state ownership. Under Fitch's criteria, QTC has been classified as a credit-linked entity of the state, due to its strategic importance to Queensland's local government sector and the state's high level of control. QTC is the state government's central financing authority, and provides debt funding and management, and other services to the state's public entities and local governments. The affirmation of the ratings of QTC's senior unsecured debt guaranteed by the Commonwealth of Australia reflects the affirmation of Australia's Long-Term Issuer Default Rating (IDR) at 'AAA' on 15 March 2016. QTC has AUD6bn in debt that benefits from a guarantee from Australia.RATING SENSITIVITIESNegative rating action could occur if there is a significant, unexpected increase in Queensland's debt along with a large deterioration in its operating performance. Forecast operating margins do not allow much room for unexpected shocks. An upgrade in the short term is unlikely as Queensland's operating and current margins would need to improve unless it reduces its debt more significantly. QTC's ratings will move in line with any rating action on Queensland.The ratings of the Australia-backed securities are linked to the ratings of the sovereign. A downgrade of the sovereign's IDR would result in a downgrade of QTC's guaranteed senior unsecured debt rating.The rating actions are as follows:State of QueenslandLong-Term Foreign-Currency IDR affirmed at 'AA'; Outlook StableShort-Term Foreign-Currency IDR affirmed at 'F1+'Long-Term Local-Currency IDR affirmed at 'AA'; Outlook StableShort-Term Local-Currency IDR affirmed at 'F1+'Queensland Treasury CorporationLong-Term Foreign-Currency IDR affirmed at 'AA'; Outlook StableShort-Term Foreign-Currency IDR affirmed at 'F1+'Long-Term Local-Currency IDR affirmed at 'AA'; Outlook StableShort-Term Local-Currency IDR affirmed at 'F1+'Rating on senior unsecured debt guaranteed by Queensland affirmed at 'AA'Rating on senior unsecured debt guaranteed by the Commonwealth of Australia affirmed at 'AAA'Contact: Primary AnalystJohn BirchDirector +62 2 8256 0345Fitch Australia Pty LtdLevel 15, 77 King Street, Sydney, NSW 2000 Secondary AnalystFernando MayorgaManaging Director+34 93 323 8407Committee ChairpersonGuilhem CostesSenior Director+34 93 323 8410Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available on www.fitchratings.comThe financial data used in Fitch's calculations is taken from Queensland's 2016-17 budget papers. We have made the following adjustments to the reported numbers:- On-passed grants and depreciation are excluded from revenue and expense figures. - Cash flows from sales and purchases of non-financial assets are included in capital revenue and capital expense figures.Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)https://www.fitchratings.com/site/re/878660Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016)https://www.fitchratings.com/site/re/877128Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1011021Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011021Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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