Rating action

Scope Ratings GmbH (Scope) has today affirmed the Land of Hesse’s (Hesse) local- and foreign-currency long-term issuer and senior unsecured debt ratings at AAA. Scope has also affirmed the local- and foreign currency short-term issuer ratings at S-1+. All Outlooks are Stable.

Download the latest rating report here.

Key rating drivers

The German federal institutional framework under which all German Länder operate is highly integrated and results in a close alignment of German Länder’s ratings with the AAA rating of the federal government. Key elements of the framework include: i) a strong revenue equalisation mechanism; ii) wide-ranging participation of the Länder in national legislation and veto rights; iii) equal involvement of the Länder in negotiations on federal reforms; and iv) a solidarity principle that ensures extraordinary system support in budgetary emergencies.

A key element of the institutional framework is the constitutional debt brake, which limits structural deficits. Recent amendments to Germany’s fiscal framework, including the easing of the debt brake, now allow the Länder collectively to run a structural deficit of up to 0.35% of national GDP and to access EUR 100bn in federally funded infrastructure spending, of which Hesse’s share is about EUR 7.4bn. While this increases fiscal flexibility, it also reflects a shift toward a more expansionary stance. Scope expects operating balances across the Länder to remain under pressure due to higher personnel and administrative costs and moderate economic growth. However, the highly integrated framework should help stabilise debt burdens over the medium term, supported by the Länder’s continued fiscal discipline and gradually rising revenues. The Federal Constitutional Court’s ruling of 15 November 2023 restricted the use of emergency credit authorisations to build reserves, a practice used by both the federation and the Länder since 2020. In Hesse, the Covid-19 special fund was closed in January 2022, leaving the Land’s budgetary and financial planning unaffected by the constitutional court ruling.

Hesse’s strong individual credit profile with the following credit strengths: i) solid budgetary performance and prudent financial management with a strong commitment to the Land’s debt brake; ii) conservative debt and liquidity policies, supported by excellent market access and a favourable debt profile; iii) limited contingent liabilities with a well-funded pension fund for its civil servants; and iv) above-average revenue flexibility.

Hesse’s conservative budgetary management, resulting in solid budgetary performance. Between 2016 and 2019, operating margins averaged 10% of operating revenue, while the balance after capital accounts averaged 2.4% of total revenue. This allowed Hesse to reduce legacy debt by EUR 200m per year before the state-level debt brake became binding in 2020.

In 2020, the Covid-19 pandemic led to a temporary budgetary deterioration due to revenue losses and additional expenditure, as well as higher borrowing under the debt brake emergency clause. At the same time, significant central government transfers cushioned the direct impact on Länder budgets. Budgetary performance recovered strongly in 2021/22, allowing Hesse to forego any additional net borrowing.

In 2023 and 2024, the budgetary performance deteriorated from the previous years as expenditure growth outpaced revenue growth. In 2023, operating revenue declined by 5% YoY and the subsequent recovery in 2024, with an increase of 3.6%, fell short of simultaneous expenditure increases driven mostly by higher personnel and transfer expenditure. This led to a reduction in the operating margin to 5.1% of operating revenue in 2023 and 2.8% in 2024, from 10.3% in 2022. This decline, combined with moderately higher interest expenses and elevated capital expenditure led to a deterioration in the overall budgetary margin (after capital accounts) to -2.0% of total revenue in 2023 and -10.3% in 2024, from +3.7% in 2022.

Budget developments in 2025 are in line with expectations. Hesse’s operating margin will remain under pressure, reaching 2.1%, as operating expenditure growth continues to exceed revenue growth. Scope expects the Land to make use of the new borrowing flexibilities under the revised debt brake and, if utilised in 2025, a budget amendment would be needed before the end of the year. Even with increased borrowing under the revised debt brake, Scope expects debt as a share of operating revenue to remain stable at around 130% as operating revenue gradually increases. For 2026 to 2028, Scope expects continued deficits after capital accounts of an average 6.1% of total revenue due to multiple budgetary headwinds. While budgetary performance will benefit from tax revenue growth of an average 3% per year, this will be largely offset by high operating and investment spending. Remaining budgetary reserves of around EUR 1.8bn and the option to take on limited amounts of structural debt provide Hesse with some budgetary flexibility. However, persistent spending pressures will make balancing budgets for the financial planning period until 2028 challenging.

Overall, Scope expects that the state’s commitment to fiscal consolidation, conservative budget management and low debt service costs will help mitigate budgetary risks and enable the state to implement its long-term fiscal consolidation strategy.

Hesse’s excellent debt management limits maturity, foreign currency and interest rate risks, while securing favourable funding conditions. The weighted average maturity of debt is around 11 years. Derivatives are used to hedge foreign exchange and interest rate risk, and exposure to these risks is minimal. Since 2021, the Land can only enter new derivative contracts to hedge foreign exchange risks and eliminate negative interest rate risks. Overall, derivative usage should continue to decline in future years.

Further, the Land has broadened its capital market presence by issuing green benchmark bonds of EUR 600m in 2021, EUR 1bn in 2023, and EUR 1.5bn in 2025. The most recent issuance was the largest among European regions to date. Scope views the green bond issuance as credit positive, as it widens the Land’s investor base. As a financially stronger Land (one of four net payers in the horizontal financial equalisation system in 2024) and a relatively larger issuer among the Länder, with EUR 8.6bn in 2025 issuance volume, the Land’s capital market access is excellent.

The state’s liquidity management is sound due to comprehensive inter-year cash planning and the availability of numerous sources of liquidity, as well as available cash buffers. Additional continued access to liquidity to bridge intraday needs, if required, is available through credit facilities from major financial institutions. An additional source of liquidity is also provided by commercial cash transactions between the German Länder, which lend excess liquidity to each other. As a consequence, the risk of liquidity shortages is negligible.

Finally, contingent liabilities and associated risks are limited. This is driven by the low level and low-risk nature of contractual guarantees, limited contingency risk stemming from its shareholdings, and a relatively smaller unfunded pension provision compared to peers together with the Land’s conservative and forward-looking management of its pension fund. Finally, pro-active management of municipal debt via its ‘Hessenkasse’ programme supports municipal finances.

While Hesse faces unfunded pension liabilities related to its civil servants, like all Länder, the risk related to these obligations is relatively lower than for most other states due to conservative management via Hesse’s pension fund, with assets worth around EUR 5.7bn as of YE 2024, covering around 6% of pension provisions. The fund is managed in a forward-looking manner, with transfers to the core budget limited to the average return of the fund.

The main rating challenge is limited expenditure flexibility, coupled with spending pressures which weigh on budgetary margins over the forecast horizon.

Hesse’s flexibility to adjust expenditure is moderate, as minimum legislative requirements and the socially sensitive nature of several expenditure items make most items difficult to trim. Inflexible spending items comprise personnel (40% of operating expenditure in 2024) and transfers (around 50%), including to municipalities. In addition, Scope expects expenditure to rise dynamically and in a broad-based fashion. This is predominantly driven by personnel expenditure, which is set to rise to EUR 13.7bn in 2025, from EUR 13.3bn in 2024, and by an average 3% per year over 2026-2028. This includes pay rises following regular negotiation rounds and a ruling by the administrative court of justice (VGH), which found the remuneration of civil servants not to be in line with the constitutional requirements (‘Alimentationsprinzip’).

Spending pressures will make balancing budgets for the financial planning period until 2028 challenging, as evidenced by budgeted but yet unidentified lower expenditure and higher revenue (‘Globale Minderausgaben’ und ‘Globale Mehreinnahmen’) of around EUR 2.4bn per year from 2026, or around 7% of operating revenue in 2024.

Scope expected Hesse to make use of the increased fiscal headroom under the revised debt brake. The Land is allocated around 7.4% of the new fiscal space (share of the 0.35% of national GDP available to all Länder) which amounts to approximately EUR 1.1bn annually based on 2024 GDP levels. Hence, we expect the current financial plan until 2028 to be revised and reflect higher nominal debt. However, debt-to-operating revenue is likely to remain broadly stable at around 130% as revenues increase, supported by a strengthening economy.

Finally, a contingency risk stems from an upcoming decision regarding the remuneration of civil servants between 2013 and 2020 by the constitutional court. A final decision is still outstanding. If the constitutional court were to confirm the assessment of Hesse’s administrative court that civil servants’ pay was too low, the Land could face significant costs. The overall budgetary effect would depend on the timeframe, especially regarding potential retroactive applicability.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. The German sovereign rating/Outlook were downgraded;
    
2. Changes to the institutional framework were to result in a notably weaker individual credit profile;
    
3. The individual credit profile deteriorated significantly and structurally.

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), centred on six analytical components: i) exceptional support and bailout practices; ii) systemic 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 German Länder operate to display ‘full’ integration for: i) exceptional support and bailout practices; ii) systemic budgetary support and fiscal equalisation; iii) fiscal rules and oversight; iv) revenue and spending powers; and v) political coherence and multilevel governance. The institutional framework displays ‘medium’ integration for funding practices. Consequently, Scope’s assessment results in an indicative downward rating distance of up to one notch between the German sovereign (AAA/Stable) and the rating of an individual state.

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) ESG.

The outcome of these assessments, as reflected in the application of the Individual Credit Profile scorecard (QS2), is an individual credit profile score for Hesse of 75 out of 100.

The mapping of this score to the range defined by the Institutional Framework assessment results in an indicative rating for Hesse aligned with the sovereign rating, corresponding to an ‘aaa’ indicative rating.

The review of potential exceptional circumstances that cannot be captured by the Institutional Framework and Individual Credit Profile scorecards did not lead to further adjustments. As such, the final rating corresponds to the indicative rating of AAA.

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

Environmental, social and governance (ESG) factors

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

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

Governance considerations are material to Hesse’s rating and are included in Scope’s institutional framework assessment and its assessment of the Land’s individual credit profile. These highlight the high quality of governance alongside the administration’s record of sound liquidity and debt management practices.

The institutional framework assessments capture governance factors under fiscal rules and oversight, assessed as ‘full integration’ for the German Länder. This reflects the comprehensive and credible fiscal framework in the form of the debt brake, as well as the strong oversight role of the Stability Council. Governance factors are also captured under political coherence and multilevel governance, assessed as ‘full integration’, reflecting Germany’s predictable and supportive federal system, where any major reforms are discussed and agreed upon well in advance and in consultation with the Länder.

The individual credit profile captures governance factors under the ‘quality of governance and financial management’, where Hesse is assessed as ‘stronger’, reflecting its: i) track record of fiscal consolidation and credible commitment to fiscal sustainability; ii) strong debt and liquidity management; iii) management of contingent liability risks related to unfunded pension liabilities via its pension fund and regular annual transfers to the fund to ensure long-term sustainability; and iv) ability to formulate and implement long-term economic and fiscal strategies. Finally, due to its accrual-based accounting, the Land’s financial reporting is more transparent than for Länder that only provide cash-based fiscal accounts, for example in relation to pension and contingent liabilities.

Environmental factors are captured under the equally named component in the individual credit profile. Hesse has adopted its first climate law in 2023 with the binding goal of reaching net greenhouse gas neutrality by 2045, which is in line with the nationwide goal, with intermediate goals of a 65% reduction vis-a-vis the 1990 level by 2030. In addition, the regional government is expected to become carbon neutral by 2030. The Land is exposed to transition risks over coming years on its path to carbon neutrality by 2045. However, due to its relatively favourable energy mix and sectors driving the regional economy, Scope considers the state relatively less exposed to climate transition risks. Finally, Scope assesses physical climate risks to be in line with the national average and other Länder.

Social considerations are included in Scope’s assessment of Hesse’s ‘social factors’. An ageing population and shortage of skilled workers are key risks related to social factors. Hesse’s old-age dependency ratio stands at 33.7% at YE 2024, below the national average of 35.9%, but still projected to increase by around 5ppts until 2030. Education, security and healthcare represent important spending areas for German Länder, which all feature prominently in the coalition’s near-term policy measures ‘Sofort-Programm 11+1 für Hessen’ introduced in 2024.

Rating Committee
The main points discussed by the rating committee were: i) institutional framework; ii) debt burden, liquidity profile and contingent liabilities; iii) debt management strategy; iv) budgetary performance and flexibility; v) regional socio-economic and demographic developments; vi) peer comparison; and vii) environmental and social factors.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sob-Sovereign Rating Methodology, 12 September 2025), is available on 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 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 scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at 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 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 and 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 and Outlooks 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: Eiko Sievert, Executive Director
Person responsible for approval of the Credit Ratings: Jakob Suwalski, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 9 November 2018. The Credit Ratings/Outlooks were last updated on 19 April 2024.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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