Rating action

Scope Ratings GmbH (Scope) has today assigned the Municipality of Trondheim long-term local- and foreign-currency issuer and senior unsecured debt ratings of AAA. Scope has also rated short-term local- and foreign currency debt at S-1+. All Outlooks are Stable.

The associated rating report is available here.

Summary and Outlook

The City of Trondheim’s AAA ratings are attributed to the following key factors:

1. A well-integrated institutional framework for Norwegian municipalities. Scope’s evaluation of the institutional arrangements leads to an indicative rating range for Norwegian municipalities spanning from AAA to AA-. This assessment underscores a well-structured framework for financial support and comprehensive fiscal equalisation systems, ensuring effective crisis response.
    
2. Trondheim’s individual credit profile (ICP) is assessed with an ICP score of 85 out of 100. This reflects Trondheim’s robust debt affordability and ample liquidity, resilient budgetary performance, its favourable position among Norwegian municipalities in terms of wealth levels and economic resilience, and its high governance quality. Low transition risks and ambitious environmental policies support the rating. Credit challenges relate to a high debt stock, limited revenue flexibility and limited expenditure flexibility.

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced. The ratings could be downgraded if: i) Norway’s sovereign rating was downgraded; ii) reforms to the Norwegian municipal framework materially weakened municipalities’ integration in institutional arrangements; and/or iii) Trondheim’s individual credit profile deteriorated significantly and structurally. 

Rating rationale

First, like all Norwegian municipalities, Trondheim benefits from a mature and well-integrated institutional framework. The key elements of the framework are: i) predictable extraordinary support and bailout practices, with the central government taking control of financial management of those municipalities facing financial difficulties to ensure that financial obligations are met; and ii) comprehensive fiscal equalisation schemes that effectively address capacity and cost disparities among municipalities, ensuring effective crisis response. Scope’s evaluation of the institutional framework for Norwegian municipalities leads to an indicative rating range spanning from AAA to AA-.

Second, Trondheim’s AAA rating is supported by a strong individual credit profile that is assessed at 85 out of 100. This reflects strong debt affordability, ample liquidity, good budgetary performance, economic resilience and robust governance quality. Another significant strength is the city’s commitment to climate action and its low carbon footprint.

Trondheim’s robust debt affordability can be attributed to its diversified sources of income, substantial liquidity reserves and strategic financial planning. Paired with a track record of prudent financial management, these factors position the city well to pursue its investment agenda and policy priorities. One key factor in this financial stability is the city’s investment fund (TKK) which was established in 2002 following the sale of the city’s energy plant. This fund generates consistent income that significantly contributes to the city’s various investment initiatives and policy priorities. The municipality’s average total liquidity, which includes both the treasury and the power fund, surged to NOK 2.8bn in 2022, up from NOK 2.1bn in 2021, effectively covering the city’s short-term payment obligations. In addition to these resources, the city treasury has access to a NOK 500m withdrawal right with its main bank. Further access to state-owned Kommunalbanken, which provides financing under favourable terms and central government policy, effectively mitigates certain refinancing risks.

Trondheim’s AAA rating also reflects the city’s strong budgetary performance, which surpasses other large municipalities in Norway. Despite facing challenges such as the Covid-19 pandemic and rising living costs, Trondheim has maintained a robust average operating margin of around 10% of operating revenue over the past three years. In 2022, Trondheim’s financial performance exceeded initial budget expectations, although it fell short of the margins achieved in 2021. The operating balance decreased from 11.9% to 8.3%. This shift was primarily due to modest 0.7% growth in operating revenue, driven by a 12% year-over-year increase in tax revenue. On the other hand, revenues from alternative sources such as grants and returns from the investment fund experienced a decline. Operating expenses surged by nearly 5%, primarily due to high inflation and growing demand for social services. Additionally, underutilisation of investment funds, at approximately NOK 850m below budget, was a result of project delays.

Scope anticipates moderate operating surpluses of 7.7% in 2023 and 6.7% in 2024, influenced by the impact of inflation and a return to more normalised tax revenue growth after the exceptional gains of 2021. Trondheim’s overall financial results are likely to show controlled deficits amounting to approximately 5% of revenues before accounting for debt movement. These results are supported by tax revenue growth surpassing budgeted figures, flexibility from the central government to compensate for extraordinary costs borne by the municipal sector, and improved returns from the investment fund. However, despite higher early-year revenue, several service areas are spending more than the 2023 budget allows, particularly in child and family services, healthcare, and housing. The city’s commitment to prudent cost control is evident in its restrained spending growth in real terms over the past three years, aligning with the 2023-26 financial plan.

Trondheim’s AAA rating also reflect the city’s high levels of wealth and diverse industrial base, which have contributed to a consistent population growth rate of 2,000-3,000 residents annually, driven by both immigration and a surplus of births. This demographic trend, combined with a robust local labour market, bolsters Trondheim’s overall economic prospects. Trondheim serves as a crucial link between Norway’s densely populated southern regions and northern territories, enhancing its economic resilience.

Another significant strength is the city’s commitment to climate action, its low carbon footprint and its strategic approach to reducing GHG emissions. This makes Trondheim a frontrunner in climate-transition readiness among Norwegian municipalities. The city’s minimal reliance on the oil and gas sector, which accounts for less than 1% of total employment, mitigates risks associated with the transition to a more sustainable economy. Trondheim is a pioneer in integrating the United Nations Sustainable Development Goals in its action plan, and the city’s climate strategy is a central component of its policy action and financial decisions.

Despite these individual strengths, Trondheim’s AAA rating faces several challenges, including a high debt stock, limited revenue flexibility and limited expenditure flexibility.

First, Trondheim’s debt stock stood at 113.9% of its operating revenue in 2022. This level is comparable to the previous year (112.9%) and lower than in 2020 (116.7%). While this debt ratio is higher than that of other large Norwegian municipalities, it remains manageable within the context of the city’s operating revenue. Scope anticipates a modest increase in the debt-to-operating revenue ratio, followed by stabilisation at around 125% by 2026. The city’s gross interest payment burden amounted to 2.5% of its operating revenue in 2022, aligning closely with other large municipalities in Norway. Scope anticipates an increase in gross interest payments to approximately 4.0% of operating revenue in the coming years. However, despite a relatively high debt burden, Trondheim maintains low net interest payments thanks to substantial liquidity reserves and income generated by the city’s investment fund. Scope projects Trondheim’s net interest payments will remain low in the coming years, at 1.2% of operating revenue, up from 0.7% in 2022.

Second, Trondheim’s revenue flexibility is limited by a significant reliance on transfers, closely mirroring the average of all Norwegian municipalities. Government grants account for approximately 40% of the city’s revenue, providing some flexibility in budget adjustments due to their largely unearmarked nature. The central government plays a role in controlling the income dynamics of the municipal sector, adjusting grants in response to robust tax revenue growth. While this practice stabilises overall revenue, it also limits the direct fiscal benefits that Trondheim could enjoy from higher tax-revenue growth.

Finally, Trondheim’s expenditure flexibility is limited by several key factors that are in line with the practices of all Norwegian municipalities. The allocation of significant funds to civil servant salaries represents a major portion of the city’s operating spending, accounting for nearly half of the total. Additionally, a high proportion of social welfare spending limits the municipality’s ability to make substantial expenditure reductions. In terms of capital expenses, Trondheim allocates an average of around 15% of its total spending to capital investments, reflecting the city’s commitment to infrastructure development and maintaining a balanced approach to managing its financial resources.

Institutional framework assessment

Scope’s institutional framework assessment determines the intergovernmental integration between sub-sovereigns and their rating anchor, which is the sovereign or a higher-tier government. To perform this assessment, Scope applies the institutional framework scorecard (QS1) focusing on six analytical components: i) extraordinary support and bailout practices; ii) ordinary budgetary support and fiscal equalisation; iii) funding practices; iv) fiscal rules and oversight; v) revenue and spending powers; and vi) political coherence and multilevel governance.

Scope considers the institutional framework under which the Norwegian sub-sovereigns operate to display full integration for: i) ordinary budgetary support and fiscal equalisation. The institutional framework displays strong integration for: i) extraordinary support and bailout practices; ii) funding practices; iii) fiscal rules and oversight; iv) revenue and spending powers; and v) political coherence and multilevel governance. Consequently, Scope’s assessment results in an indicative downward rating distance of up to three notches between Norway’s sovereign rating (AAA/Stable) and the rating of an individual sub-sovereign.

Individual credit profile

Scope assesses the individual credit profile based on quantitative and qualitative analysis of four risk categories: i) debt and liquidity; ii) budget; iii) economy; and iv) governance. These are further complemented by additional adjustments for environmental factors and resilience and social factors and resilience.

The outcome of these assessments, as reflected in the application of the individual credit profile scorecard (QS2), is an individual credit profile score of 85 out of 100 for Trondheim.

The mapping of this score to the range defined by the institutional framework assessment results in an indicative rating for the Municipality of Trondheim that is aligned with the sovereign rating, corresponding to an AAA indicative rating.

A review of potential exceptional circumstances that cannot be captured by the institutional framework and individual credit profile scorecards did not lead to further adjustments to Trondheim’s indicative rating. As a result, the final rating corresponds to the indicative rating of AAA.

The results have been discussed and confirmed by a rating committee.

Factoring of environment, social and governance (ESG)

ESG factors material to Trondheim’s credit quality are captured by Scope’s rating approach through several analytical areas.

Scope’s assessment of Norway’s sovereign credit quality includes an appraisal of ESG risks as detailed in Scope’s Sovereign Rating Methodology.

Governance considerations are material to Trondheim’s rating and are included in Scope’s institutional framework assessment and its assessment of the municipality’s individual credit profile. These assessments highlight the robust quality of governance alongside the administration’s record of sound liquidity and prudent budgetary planning practices.

The institutional framework assessment captures governance factors under political coherence and multilevel governance, assessed as ‘strong integration’ for the Norwegian municipalities. This reflects extensive inter-municipal and inter-regional cooperation that fosters policy coordination and a balanced, stable governance structure.

The individual credit profile captures governance factors under the quality of governance and financial management, where Trondheim is assessed as ‘stronger’, reflecting its i) buildup of budgetary reserves and substantial liquidity reserves; and ii) regular fulfilment of policy objectives defined in strategic plans.

Social considerations are included in Scope’s assessment of Trondheim’s ‘economy and social profile’, highlighting a healthy labour market, a positive economic structure and favourable demographics.

Long-term environmental developments play a direct role in this rating action as Trondheim excels in climate-transition readiness among Norwegian municipalities.

Rating Committee
The main points discussed by the rating committee were: i) institutional framework for Norway’s municipalities; ii) debt and liquidity profile; iii) budget performance, revenue flexibility and expenditure flexibility; iv) economic developments; v) governance, regional socioeconomic and environmental risks; and vii) peer comparison.

Methodology
The methodology used for these Credit Ratings and Outlooks (Sub-Sovereigns Rating Methodology, 11 October 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Senior Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 22 September 2023.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Trondheim are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2023" published on 3 April 2023 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the deviation was due to the first-time rating assignment.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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