Moody's Investors Service has today upgraded to
Baa1 (Global scale, local currency) from Baa3, issuer ratings of the city of Lima. The outlook has changed to stable from positive.
Today's action was prompted by Peru's government bond ratings upgrade to A3, stable outlook. For full details please refer to the sovereign press release.
The upgrade of the city of Lima follows the upgrade on Peru's ratings reflecting the economic and financial links of Lima with the central government. Lima contributes to 48% of Peru's GDP and wealth levels are higher than the national average. The rating action also reflects Lima's strong governance and management practices that support a solid financial performance, moderate debt levels and high liquidity.
Lima's high own source revenue base (92.1% of total revenues) and growth in the last five years (CAGR of 10.3% over the last five years) have supported strong gross operating balances (GOB) that averaged 34.8% of operating revenue between 2009-2013. Economic prospects for the country are favorable and are expected to translate in Lima's solid and sustained own-source revenue growth. Also, Lima's capacity to adjust operating expenditures in line with operating revenue growth will sustain the continuous recording of high GOB, a key strength of Lima's credit quality.
While Lima's consolidated financial results have been volatile, driven primarily by the impact that the election cycle exerts on the level of capital spending, in 2013 the cash financing requirement was equivalent to -4.7% of total revenues and we expect that in 2014 it will remain moderate. Debt to total revenue stood at 32.9% in 2013 and Moody's estimates that it will remain moderate and around 38% in 2014. While the portion of foreign currency debt is 33.3%, Lima is in the process of contracting currency swaps to limit foreign exchange risk. Liquidity measured by working capital to total revenues was 73.3% in 2013, a very high level that provides a solid cushion under unforeseen shocks.
The outlook change to stable is primarily driven by a similar outlook change on Peru's government bond rating. It also reflects Moody's expectation that the city's financial performance will remain sound in the next 12-18 months.