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Scope affirms Land of Berlin credit rating of AAA with Stable Outlook

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Scope affirms Land of Berlin credit rating of AAA with Stable Outlook

Very supportive institutional framework, commitment to fiscal consolidation, downward debt trajectory and strong liquidity management support the rating. High legacy debt, limited financial flexibility and contingent liabilities remain challenges.

Scope Ratings GmbH has today affirmed the Land of Berlin’s long-term issuer rating at AAA and short-term issuer rating at S-1+. The sub-sovereign’s senior unsecured debt is also affirmed at AAA. All ratings are expressed in both local and foreign currency. All Outlooks are Stable.

Rating drivers

The AAA rating reflects the strong support for Berlin from the German institutional framework, a clear commitment to fiscal consolidation, the firm downward trajectory and favourable profile of the Land’s direct debt, as well as strong liquidity management. Challenges to the rating include legacy debt levels that remain high and limited fiscal flexibility which is mitigated in part by a growing proportion of more flexible capital expenditures. The Land of Berlin’s contingent liabilities are sizeable, but Scope believes they pose low risks to its balance sheet. The Stable Outlook reflects Scope’s assessment that risks for the Land of Berlin remain balanced.

The Land of Berlin’s AAA rating is bolstered by a very supportive German institutional system with a very strong revenue equalisation mechanism, a legally tested extraordinary support mechanism, a safe and predictable cash management system designed to guarantee efficiency and liquidity at any point in time, and access to deep capital markets. It is Scope’s view that these factors align the credit profiles of the Länder and the federal government (the Bund, AAA, Stable Outlook).

Following significant consolidation efforts, Berlin’s budgetary performance has improved substantially on past years of successive deficits. High operating surpluses averaging 14.2% of operating revenues from 2012-2017 (above the Länder average of 12.3%) enhanced Berlin’s ability not only to fund its operating expenses with operating revenue but also to realise extra revenue to cover interest payments and some capital expenditure. The Land’s balance before debt movement has remained in positive territory since 2012, supporting a gradual reduction of Berlin’s debt burden. In 2017, Berlin continued to demonstrate its fiscal commitment, also benefitting from sustained and strong tax revenue growth as well as greater fiscal room thanks to its solid track record of fiscal consolidation. Under the conservative medium-term financial plan for 2018-2021, Scope expects operating surpluses to decline slightly but to average 12.3% of operating revenues due to rising operating expenses and investments needed to address the city’s rapid growth and migration flows. Over the medium term, Scope expects the Land to maintain its prudent budgetary policy and adhere to its consolidation strategy.

Scope views the Land of Berlin’s liquidity management as sound. The key elements of this management are comprehensive inter-year cash planning and the availability of numerous sources of liquidity, reflecting sophisticated state treasury and liquidity management. Additional continued access to liquidity to bridge intraday needs, if required, is available through credit facilities from major financial institutions. Further liquidity is also available from cash transactions between the German Länder, which place excess liquidity with each other, effectively acting as lenders, as well as mutual agreements between the Länder and the Bund in case of need during periods of stress.

The Land of Berlin has a solid track record regarding access to capital markets. During the last financial crisis, access remained excellent, reflecting investor confidence in the German solidarity system. At the end of 2017, Berlin lengthened its weighted debt maturity to 7.6 years, up from 7.1 years at the end of 2016. Scope views the Land’s debt profile as favourable, with debt reductions in combination with excellent market access resulting in a low average cost of outstanding debt of 1.8% in 2017. Lower net interest payments have halved the burden on the budget to 4.9% of operating revenues in 2017, down from 9.6% in 2012.

Berlin benefits from favourable economic and demographic trends. In 2017, Berlin’s GDP expanded by 3.1%, outperforming the German average of 2.2%. Should growth continue to exceed the German average, the GDP-per-capita gap between the Land of Berlin and the German average will be further reduced. In addition, strong economic growth led to a reduction in the unemployment rate of the Land of Berlin, down to 9% in 2017 from 12.3% in 2012.

Despite these strengths, Berlin faces several challenges. Berlin’s debt burden is very high by both national and international standards, despite the firm downward trend since 2010. Direct debt together with outstanding guarantees amounts to EUR 64.1bn or 240% of the Land’s operating revenue as of end-2017, slightly down from 257.7% at end-2016. The robust growth of operating revenues and thus positive balances before debt movements have enabled this downward trend. Scope expects this downward trend to continue, in keeping with the Land’s medium-term financial planning.

The Land of Berlin also faces the challenge of limited fiscal flexibility. While Scope notes positively the rising proportion of overall capital expenditures, which increase fiscal flexibility, this flexibility remains constrained by the fact that most expenditures result from rigid personnel and transfer payments. In addition, due to the extensive shareholdings of the Land of Berlin, the high level of contingent liabilities is also a concern, which, however, is mitigated by the largely low-risk profiles of the companies that the Land of Berlin partially or wholly owns. Scope views positively the entities’ consolidated low leverage ratio of total liabilities to assets of 0.52. This ratio accounts for an increase in the consolidated debt of the major entities, excluding the regional promotional bank ‘Investitionsbank Berlin’, to EUR 16.5bn in 2017 from EUR 15.54bn in 2016. This increase is somewhat offset by the high level of assets, in part due to the Land’s shareholding in the real estate and housing sectors, which have experienced a rise in value.

With the exception of the Berlin Brandenburg Airport, all major shareholding entities were profitable in 2017, which is reflected in a consolidated net surplus of EUR 0.59bn on a projected basis. The low and decreasing share of loss-making companies (in 2016, eight of 56 companies had negative results versus 10 in 2015) and good annual results overall, support sustained high levels of investment volume. It is Scope’s view that the associated companies fulfil a significant public-sector mandate for the Land of Berlin by contributing to the further development of Berlin’s dynamic growth, as well as strengthening the regional economy.

Outlook and rating-change drivers

The Stable Outlook reflects good visibility on the evolution of the very supportive German institutional framework and Scope’s expectation that Berlin’s government will keep to its fiscal consolidation programme and continue to place the Land’s debt on a firm downward trajectory over the medium term.

The ratings could be downgraded if: i) the German sovereign rating were to be downgraded or ii) changes in the institutional framework resulted in notably weaker support.

Rating committee

The main points discussed during the rating committee were: i) the institutional framework; ii) fiscal flexibility; iii) Berlin’s economic structure; iv) debt and fiscal developments; v) the state of contingent liabilities, in particular the Bankgesellschaft transaction, the Berlin Brandenburg Airport and social housing association debt; vi) the activity of the Land’s investment fund SIWANA; and vii) international peers comparison.

Methodology

The methodology applicable for this rating and/or rating outlook Rating Methodology: Sub-Sovereign Rating, is available on www.scoperatings.com.

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Oil slips after U.S. crude stocks rise amid deep freeze hit to refiners

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Oil slips after U.S. crude stocks rise amid deep freeze hit to refiners 1

By Sonali Paul

MELBOURNE (Reuters) – Oil prices fell in early trade on Wednesday after industry data showed U.S. crude inventories unexpectedly rose last week as a deep freeze in the southern states curbed demand from refineries that were forced to shut.

Crude stockpiles rose by 1 million barrels in the week to Feb. 19, the American Petroleum Institute (API) reported on Tuesday, against estimates for a draw of 5.2 million barrels in a Reuters poll.

API data showed refinery crude runs fell by 2.2 million bpd.

U.S. West Texas Intermediate (WTI) crude futures were down 55 cents or 0.9% at $61.12 a barrel at 0136 GMT, after slipping 3 cents on Tuesday.

Brent crude futures fell 38 cents, or 0.6%, to $64.99 a barrel, erasing Tuesday’s 13 cents gain.

Investors will be awaiting confirmation from the U.S. Energy Information Administration later on Wednesday that crude inventories rose last week, despite the hit to shale oil production amid the unprecedented icy spell in the U.S. south.

“The key question is how quickly does U.S. oil supply recover. It looks like supply will recover faster than refineries, and supply is going to outpace demand in the next few weeks. That will give negative weight to the market,” Commonwealth Bank analyst Vivek Dhar said.

The price retreat is being seen as a pause following a rally of more than 26% to 13-month highs in both Brent and WTI since the start of the year.

Prices have jumped due to the U.S. supply disruption and supply discipline by the Organization of the Petroleum Exporting Countries and allies, together called OPEC+, led by an extra 1 million bpd cut by Saudi Arabia.

At the same time stimulus spending to boost growth, investors rotating into commodities, and hopes that the rollout of vaccinations could lead to an easing of pandemic restrictions are all buoying oil prices.

(Reporting by Sonali Paul; Editing by Edwina Gibbs)

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Oil settles mixed amid post-storm uncertainty

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Oil settles mixed amid post-storm uncertainty 2

By Laura Sanicola

NEW YORK (Reuters) – Oil prices settled near year-long highs on Tuesday on signs that global coronavirus restrictions were being eased, although concerns about the pace of a U.S. economic recovery and the return of Texas oil production kept gains in check.

U.S. crude settled down 3 cents to $61.67 a barrel, still close to its highest levels since January 2020. Brent crude <LCOc1> settled up 13 cents, or 0.2%, to $65.37 a barrel.

Both contracts rose more than $1 earlier before retreating.

Shale oil producers and refiners in the southern United States are slowly resuming production after 2 million barrels per day (bpd) of crude output and nearly 20% of U.S. refining capacity shut down because of last week’s winter storm.

Traffic at the Houston ship channel was slowly returning to normal. Production, however, was not expected to fully restart soon and some shale producers forecast lower oil output in the first quarter.

Some oil production may never come back, commodities merchant Trafigura said on Tuesday.

After the cold snap, U.S. crude oil stockpiles were also seen falling for a fifth straight week, while the inventories of refined products also declined last week, an extended Reuters poll showed.

“It appears that last week’s severe cold spell and related Texas power outage could be affecting the weekly EIA data into the middle of next month,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

There were also concerns over the U.S. economic recovery, which the chair of the Federal Reserve, Jerome Powell, said remained “uneven and far from complete.”

He said it would be “some time” before the central bank considered changing policies it had adopted to help the country back to full employment.

Commerzbank analyst Eugen Weinberg said the recent oil price rise was buoyed by upbeat price forecasts from U.S. brokers.

Goldman Sachs expects Brent prices to reach $70 per barrel in the second quarter from the $60 it predicted previously, and $75 in the third quarter from $65 forecast earlier.

Morgan Stanley, which expects Brent to reach $70 in the third quarter, said new COVID-19 cases were falling while “mobility statistics are bottoming out and are starting to improve”.

Bank of America said Brent prices could temporarily spike to $70 in the second quarter.

(Reporting by Laura Sanicola in New York; Additional reporting by Bozorgmehr Sharafedin in London and Jessica Jaganathan in Singapore; Editing by Matthew Lewis and Mark Heinrich)

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Exclusive: AstraZeneca to miss second-quarter EU vaccine supply target by half – EU official

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Exclusive: AstraZeneca to miss second-quarter EU vaccine supply target by half - EU official 3

By Francesco Guarascio

BRUSSELS (Reuters) – AstraZeneca expects to deliver less than half the COVID-19 vaccines it was contracted to supply the European Union in the second quarter, an EU official told Reuters on Tuesday.

The expected shortfall, which has not previously been reported, comes after a big reduction in supplies in the first quarter and could hit the EU’s ability to meet its target of vaccinating 70% of adults by the summer.

The EU official, who is directly involved in talks with the Anglo-Swedish drugmaker, said the company had told the bloc during internal meetings that it “would deliver less than 90 million doses in the second quarter”.

AstraZeneca’s contract with the EU, which was leaked last week, showed the company had committed to delivering 180 million doses to the 27-nation bloc in the second quarter.

“Because we are working incredibly hard to increase the productivity of our EU supply chain, and doing everything possible to make use of our global supply chain, we are hopeful that we will be able to bring our deliveries closer in line with the advance purchase agreement,” a spokesman for AstraZeneca said, declining to comment on specific figures.

A spokesman for the European Commission, which coordinates talks with vaccine manufacturers, said it could not comment on the discussions as they were confidential.

He said the EU should have more than enough shots to hit its vaccination targets if the expected and agreed deliveries from other suppliers are met, regardless of the situation with AstraZeneca.

The EU official, who spoke to Reuters on condition of anonymity, confirmed that AstraZeneca planned to deliver about 40 million doses in the first quarter, again less than half the 90 million shots it was supposed to supply.

AstraZeneca warned the EU in January that it would fall short of its first-quarter commitments due to production issues. It was also due to deliver 30 million doses in the last quarter of 2020 but did not supply any shots last year as its vaccine had yet to be approved by the EU.

All told, AstraZeneca’s total supply to the EU could be about 130 million doses by the end of June, well below the 300 million it committed to deliver to the bloc by then.

The EU has also faced delays in deliveries of the vaccine developed by Pfizer and BioNTech as well as Moderna’s shot. So far they are the only vaccines approved for use by the EU’s drug regulator.

AstraZeneca’s vaccine was authorised in late January and some EU member states such as Hungary are also using COVID-19 shots developed in China and Russia.

OUTPUT BOOST DOWN THE LINE?

While drugmakers developed COVID-19 vaccines at breakneck speed, many have struggled with manufacturing delays due to complex production processes, limited facilities and bottlenecks in the supply of vaccine ingredients.

According to a German health ministry document dated Feb. 22, AstraZeneca is forecast to make up all of the shortfalls in deliveries by the end of September.

The document seen by Reuters shows Germany expects to receive 34 million doses in the third quarter, taking its total to 56 million shots, which is in line with its full share of the 300 million doses AstraZeneca is due to supply to the EU.

The German health ministry was not immediately available for a comment.

If AstraZeneca does ramp up its output in the third quarter, that could help the EU meet its vaccination target, though the EU official said the bloc’s negotiators were wary because the company had not clarified where the extra doses would come from.”Closing the gap in supplies in the third quarter might be unrealistic,” the official said, adding that figures on deliveries had been changed by the company many times.

The EU contracts stipulates that AstraZeneca will commit to its “best reasonable efforts” to deliver by a set timetable.

“We are continuously revising our delivery schedule and informing the European Commission on a weekly basis of our plans to bring more vaccines to Europe,” the AstraZeneca spokesman said.

Under the EU contract leaked last week, AstraZeneca committed to producing vaccines for the bloc at two plants in the United Kingdom, one in Belgium and one in the Netherlands.

However, the company is not currently exporting vaccines made in the United Kingdom, in line with its separate contract with the British government, EU officials said.

AstraZeneca also has vaccine plants in other sites around the world and it has told the EU it could provide more doses from its global supply chain, including from India and the United States, an EU official told Reuters last week.

Earlier this month, AstraZeneca said it expected to make more than 200 million doses per month globally by April, double February’s level, as it works to expand global capacity and productivity.

(Reporting by Francesco Guarascio @fraguarascio; Additional reporting by Andreas Rinke and Sabine Siebold; Editing by David Clarke)

 

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