Bangkok--11 Sep--Standard & Poor's
- We have refined our methodology for rating a local or regional government (LRG) higher than the sovereign in which the LRG is domiciled.
- We have lowered our local currency long-term issuer credit rating on Seoul Metropolitan Government to 'A' from 'A+' and affirmed our 'A' foreign currency long-term issuer credit rating on the entity.
- The outlook on the long-term ratings is stable.
Standard & Poor's Ratings Services today lowered to 'A' from 'A+' its local currency long-term issuer credit rating on Seoul Metropolitan Government (SMG). At the same time, Standard & Poor's affirmed its 'A' foreign currency long-term issuer credit rating, 'A-1' local and foreign currency short-term issuer ratings, and 'A' senior unsecured debt rating on SMG. The outlook on the local and foreign currency long-term issuer credit ratings is stable.
We have lowered the local currency rating on SMG to the same level as the foreign currency rating on the Republic of Korea (foreign currency A/Stable/A-1; local currency A+/Stable/A-1), in line with our refined methodology, which is detailed in the article "Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign," published Sept. 9, 2009, on RatingsDirect.
In order to assign an LRG a local currency rating above the sovereign's foreign currency rating, Standard & Poor's assesses whether it believes there is a measurable likelihood that the LRG's credit characteristics will remain stronger than those of the sovereign in a scenario of economic or political stress. In other words, Standard & Poor's considers whether the structural differences and the institutional features allowing the LRG to be rated above the sovereign are resilient to a major economic or political disruption, and whether the LRG would have sufficient flexibility to mitigate negative intervention from the government.
This concept translates into three fundamental conditions. For Standard & Poor's to rate an LRG higher than its sovereign, the LRG is expected to exhibit the following:
-- The ability to maintain stronger credit characteristics than the sovereign in a stress scenario;
-- An institutional framework that is predictable and that limits the risk of negative sovereign intervention; and
-- The ability to mitigate negative intervention from the sovereign thanks to high financial flexibility and independent treasury management.
In the case of SMG, Standard & Poor's believes there is a fairly high correlation in economic and financial performance between the Republic of Korea and SMG. Furthermore, SMG does not have sufficient operational and financial flexibility to deal with potential stresses better than the sovereign, and its credit characteristics are likely to deteriorate together with those of the sovereign in severe macroeconomic or geopolitical stress scenarios. Indeed, over the past 10 years, SMG has displayed similar movements to Korea in terms of GDP growth, unemployment ratio trends, and private sector debt default rates trends.
SMG is the financial and administrative capital of South Korea, its population accounts for about 21% of that of the republic, and its GDP represents about 22% of the national output. Moreover, around 20% of SMG's operating revenues are subject to the central government's real estate policy, with a further 17% directly linked to the central government's tax revenue performance. One of the key constraining factors for the sovereign rating on Korea is that it faces a geopolitical threat in the form of an unpredictable nuclear-armed northern neighbor that depends on foreign aid to maintain its regime. The risks and contingent liabilities associated with this threat also impact SMG's creditworthiness.
The long-term ratings on SMG are supported by the entity's sound fiscal performance, moderate levels of debt and strong ties to the central government. The ratings are constrained by the unprofitable and heavily indebted subway subsidiaries.
The stable outlook on both the local and foreign currency ratings reflects Standard & Poor's expectation that SMG will maintain sound fiscal performance and moderate levels of direct debt. Given the high correlation in economic and financial performance between the Republic of Korea and SMG, any future changes in the ratings on SMG may also be linked to movements in the sovereign ratings on Korea.
Related Research:
"Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign," published Sept. 9, 2009.
A Korean-language version of this media release is available via standardandpoors.co.kr or via Standard & Poor's CreditWire Korea on Bloomberg Professional at SPCK. Complete ratings information is available to RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Ratings in the left navigation bar, select Find a Rating.
Ratings List
Downgraded; Ratings Affirmed
To From
Seoul Metropolitan Government
Issuer Credit Rating
Local Currency A/Stable/A-1 A+/Stable/A-1
Foreign Currency A/Stable/A-1
Senior Unsecured A
Media Contact:
David Wargin, New York (1) 212-438-1579, [email protected]
Analyst Contact:
JaeMin Kwon, CFA, Hong Kong (852) 2533-3539