Guidelines on Local Government Borrowing and Recent Developments in South East Europe
Local governments' creditworthiness indicators

Financial Risk Profile Analysis according to Standard and Poor's credit rating methodology

Financial Risk Analysis
Surplus Generation and Debt Servicing Ability Cash Flow Adequacy Capital Structure Liquidity and Financial Flexibility

Analytical distinctions with profitability


Type and structure of debt


Analysis cash flow coverage and cash generation abulity

Focus on debt service capability

Analytical distinctions with profitability


Type and structure of debt


Analysis cash flow coverage and cash generation abulity

Leverage

Type and structure of debt


Hedging arrangements

Off-balance sheet obligations


Asset values

Sources of liquidity

Potential calls on liquidity


Short term debt maturity

Bank credit facilities


Unencumbered assets and debt capacity

Overview of typical financial ratios used in assessing local governments' financial position


Ratios Definitions Interpretation
Recurrent Revenues / Total Revenues Measures the degree to
which a local government
relies on recurrent revenues.
A ratio of 100% or close to 100% may
be inappropriate for a local government
that is funding the acquisition of significant
nonfinancial assets.
Recurrent Revenues
per Capita
Measures the relative burden
of taxes and user charges on
local taxpayers and service
users.
A higher level of operating revenues per
capita indicates a relatively high burden
of taxes and charges.
Own-Source Revenues
/ Total Revenues
Measures a local government's
own-source revenues
compared to its total revenues.
A relatively high percentage of ownsource
revenues (max indicator 100%)
indicate that the local government is
more reliant on recurrent, predictable
revenues to fund its activities.
Own-Source Revenues
/ Operating
Expenditures
Measures a local government's
own-source revenues
compared to its operating
expenditures.
A ratio of 100% or more indicates that
the local government has surplus ownsource
revenues available to apply to
non-operating expenses. A ratio of less
than 100% indicates that a local government
that is dependent on non-own
source revenues.
Key Own-Source Revenues
/ Total Revenues
Measures the reliance by a
local government on each of
the principal own-source revenues
for local governments
generally.
The relative reliance on each of the ownsource
revenues by a local government
can be indicator of creditworthiness.
Actual to budget Measures the ratio of initial
and final budget projections
to actual results.
Show the degree of accuracy in budgeting.
It represents how well a local
government can plan and manage its
finances over time
Relative growth Shows how changes in revenue
compare to changes in
expenditures over time.
Faster growing expenditures will eventually
lead to a deficit, if revenue growth
decreases. Conversely, faster revenue
growth will produce or maintain a future
operating surplus.
Long-Term Debt Service
/ Recurrent Revenues
Measure of the ability of a
local government to service
debt.
The higher a local government's liquid
short-term assets compared to its short
term liabilities, the greater its liquidity
and the greater its ability to cover its
short-term liabilities during periods of
unexpected revenue shortfalls.
Liquid Short-Term Assets
/ Short-Term Liabilities
Measures a local government's
liquidity position.
The higher a local government's liquid
short-term assets compared to its short
term liabilities, the greater its liquidity
and the greater its ability to cover its
short-term liabilities during periods of
unexpected revenue shortfalls.
Outstanding debt This indicator looks at the
structure and amount of
long-term debt liabilities.
These are basic indicators and therefore
the data must be consistently available
from balance sheets to be a reliable indicator.
Net Financial Balance
and Debt Service Coverage
Ratios
Provides a margin of financial
safety in case of unanticipated
expenses or revenue
shortfalls.
A portion of a net financial surplus can
be used to support additional debt and/
or to pay the cost of acquiring nonfinancial
assets to the extent that revenues
from non-financial assets and
the planned issuance of debt don't fully
cover that cost.
Debt Service Coverage
Ratios
It is a measure of the financial
margin of safety provided
in the local government's
budget to ensure lenders
that the local government
will have sufficient funds
available to service its debt.
A debt service coverage ratio of 1.0 indicates
that the borrower will have funds
available in exactly the same amount as
the required debt service. A debt service
ratio of less than 1.0 implies that that
the borrower will have insufficient funds
available to service the debt. Lenders
typically require debt service coverage
greater than 1.0 when they consider
making a loan.

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