Saxony-Anhalt, Land of
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  • 1. www.moodys.com Moody’s International Credit Analysis Public Finance September 2008 Table of Contents: Saxony-Anhalt, Land of Germany Summary Rating Rationale 1 Rating Outlook 2 Key Rating Considerations 2 Financial Position and Performance 2 Debt Profile 4 Summary Rating Rationale Governance and Management Factors 5 The Land of Saxony-Anhalt’s Aa1 issuer and long-term bond ratings and its P-1 Economic Fundamentals 5 short-term rating, with stable outlook, reflect a number of elements, including Operating Environment 7 improving financial performances and budget discipline, in a context of a still Institutional Framework 7 modest revenue base. A recent history of meeting targets more consistently Annual Statistics 8 provides Moody’s with comfort that the goals of the current fiscal period will be Moody’s Related Research 16 achieved. The Land succeeded in balancing accounts for the first time in 2007, thanks to growing tax proceeds and major consolidation efforts started a few years ago. The debt burden remains very high, as is true for most German Länder, Analyst Contacts: although the government is making progress in its efforts toward a progressive – albeit slight – reduction in debt with effect from 2009. Medium-term growth Milan 39.02.9148.1100 prospects are enhanced by restructuring and continued transformation of the 7 Massimo Visconti economic base, albeit against a background of the sharp economic slowdown of Vice President - Senior Analyst Germany. Frankfurt 49.69.70730.700 As a reflection of the application of Moody’s Joint-Default Analysis methodology for 16 Andrea Wehmeier regional and local governments (RLGs), Saxony-Anhalt’s Aa1 rating is composed Vice President - Senior Analyst of two principal inputs: a Baseline Credit Assessment (BCA) of 4, on a scale of 1 to 21, in which 1 represents the lowest credit risk; and a very high likelihood that the New York 1.212.553.1653 Federal Republic of Germany (Aaa, stable) would act to prevent a default by 0 Yves Lemay Saxony-Anhalt. The very high likelihood of support reflects Moody’s opinion of (i) Team Managing Director the elevated reputation risk for Germany as a whole in case of default by a Land, and (ii) the Bundestreuekonzept, according to which all German Länder must express mutual solidarity in the event that one of them or the Federal Republic faces a severe budgetary crisis. Also, the debt volumes and structure of German Länder are extremely complex and an event of non-payment would be considered to have a corresponding impact on Germany as a whole. In Moody’s opinion, the principle of solidarity is firmly entrenched in the Grundgesetz (Basic Law), thereby providing reassurance that, if required, financial support for a member in distress would be forthcoming. This Credit Analysis provides an in-depth discussion of credit rating(s) for Saxony- Anhalt, Land of, and should be read in conjunction with Moody’s most recent Credit Opinion and rating information available on Moody’s website. Click heren to link.
  • 2. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Rating Outlook The outlook is stable, reflecting both strong system support and the Land’s efforts to control deficits and recourse to debt funding. Budget discipline has improved as growth in spending has become more controlled. Notwithstanding a possible slowdown in operating revenues in the coming years, the current consolidation policy should enable the Land to maintain balanced budgets for the next two years. Moody’s will continue to follow the Land’s actions toward debt stabilisation in 2008 and the subsequent reduction process expected to start in 2009. Key Rating Considerations Financial Position and Performance Key Indicators Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 GDP per capita 18255 18867 19181 19945 20988 Intergovernmental revenues as a % of Operating Revenues 42.81 42.56 44.71 43.65 42.33 Interest payments as a % of Operating Revenues 11.15 10.54 10.74 10.49 9.99 Gross Operating Balance as a % of Operating Revenues -5.58 -1.58 -0.23 3.39 10.23 Financing surplus(deficit) as % of Total Revenues -16.33 -10.81 -11.56 -5.68 1.17 Net Direct and Guaranteed Debt as a % of Operating Revenues 237.02 245.05 257.76 243.66 239.03 Capital expenses as a % of Total expenses 20.98 18.66 19.72 16.95 16.80 Improving financial results Saxony-Anhalt’s budgetary results markedly improved in 2007, continuing the positive trend started in 2003. For the second year in a row the Land recorded a positive operating surplus, at 10.2% of operating revenues in 2007. This result – remarkably high when compared to 3.4% in 2006 and -0.2% in 2005 – was mainly driven by tight cost controls associated with growing operating revenues related to the economic recovery across Germany. The positive development is reflected on the pre-funding side, whereby the Land was able to achieve a modest surplus for the first time in 2007. Namely, higher operating revenues and a slight reduction of capital spending enabled the Land to generate a pre-funding surplus totalling 1.2% of total revenues in 2007 vs. a 5.7% deficit in 2006. The improving trend of this ratio is further evidenced when compared to an 11.6% deficit in 2005 and from an average of 14.1% for the 2002-2004 period. Expectations for 2008 and 2009 are still positive and should enable the Land to preserve its financial equilibrium. The consolidation process is primarily based on the expectations of operating revenues growth – that is largely an exogenous variable – followed by sustained efforts to control the expenditure side (primary spending such as personnel, goods and services). Moody’s will carefully monitor this process which appears more challenging than in the past, given the current rapid slowdown of the German economy. Operating revenue growth bolstered by national tax reform and economic rebound In terms of revenue, similar to the rest of the Länder, Saxony-Anhalt experienced a decline in fiscal revenue in 2001 as direct consequence of both the implementation of the first stage of the tax reform and slow economic growth. Compared to the western Länder, however, the decline was comparatively limited, as Saxony-Anhalt receives ongoing transfers as part of the Solidarity Pact II (according to which western Länder grant additional transfers to eastern Länder to bolster after-unification effects), thereby stabilising the revenue development. In 2001, operating revenues decreased by 0.9%, followed by another 2.2% decline in 2003. 2 September 2008 Credit Analysis Moody’s International Public Finance – Saxony-Anhalt, Land of
  • 3. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Against this background, 2004 and 2006 results were extremely positive: operating revenues increased by 3.3% and 5.9%, respectively, whereas in 2005 a modest surplus of 0.9% was recorded. These positive results were driven by the completion of the tax reform and the economic rebound, both at national and regional level, which translated into higher tax revenues and higher transfers. After a strong 2007, when the Land benefited from, among others, the VAT hike from 16% to 19%, Moody’s again expects a comfortable development of the revenue side for 2008 based on latest May tax forecast. For Germany as a whole, real GDP growth of 1.7% is expected, but Saxony-Anhalt might be able to slightly exceed this growth rate. Saxony-Anhalt expects an average yearly tax growth rate of 3.5% from 2008 to 2012. Moody’s considers the forecasts to be achievable at least for 2008, although there is a possibility of a more pronounced slowdown of the German economy as a whole. This will have unavoidable adverse repercussions on the Land’s future operating budgets, which are expected to slightly decline but remain positive for the next two years. In this regard the recent creation of a particular reserve against tax shortfall should provide some cushion, provided that the Land is capable of progressively replenishing this reserve in the coming years; bringing the reserve to €500 million by the end of 2017. On the capital side, revenues are on a declining trend, reflecting the declining Solidarity Pact II transfers intended to bolster the post-unification effects. These transfers will be phased out in 2020 and will provide a reliable revenue source until then. Expenditure – stabilisation is key Operating expenditures have been kept structurally flat in the past five years (-0.2% on average) and hence negative in real terms. In 2006, the growth rate exceeded 2% for the first time since 2002, mainly due to higher transfers to the municipal level – a direct result of higher tax revenues – as these transfers are linked accordingly. This growth was immediately offset by a 2.2% decrease in 2007 as a result of continuous consolidation efforts. If the government realises its plans, operating expenditure growth should be around 0.7% p.a. until 2012, an ambitious target. Cost containment was achieved by the continued personnel reduction and cost savings programme and by the reforms at the municipal level. The former led to a sizable reduction in the share of personnel costs to 27.1% of operating expenses in 2007, from 34.8% in 2001. In the 2008 to 2011 period, another 6,618 full-time equivalent (FTE) units will be cut, although the effect will be mitigated by alignments of wages closer to the level that is paid in the western Länder. On the municipal level, the Land carries out rationalisation efforts, thus reducing the number of municipalities and administrative districts in order to prepare and adapt for the demographic developments and to enhance efficiency. With these measures, the Land aims to keep the nominal operating expenditure nearly constant in the 2008-2012 period, which, nevertheless, appears challenging. The government plans to ease the pressure arising from rising interest costs (+6% until 2011) by a reduction of outstanding debt, starting from 2009 with a €25 million redemption. The pace of this reduction should be set- up with planned redemptions of €100 million in 2010, €150 million in 2011 and €200 in 2012, although the effect on interest costs should only become noticeable in the longer term. In general, other spending items have been relatively stable. Administration committed to a tighter medium-term financing plan: zero net new borrowing in 2008 and small reductions of outstanding debt thereafter After the Land’s 2006 election, the new administration published the motto “consolidation, investment and precaution” as a guideline for its fiscal policy. Under its 2008-2012 medium-term financing plan, the commitment to fiscal consolidation translates into a maintenance of zero net new borrowing for 2008, which is achievable, and the reduction of outstanding direct debt from 2009 onwards. This appears feasible if GDP growth in Germany stops or reverses its currently declining trend, and if the Land continues to closely control expenditures. The main focus will continue to be efforts to rationalise and curb expenditure growth both at Länder and at municipal level. Saxony-Anhalt has implemented substantial cuts in personnel since 1991 (employment reduction from 110,000 to 62,000), and it plans further reduction in personnel. However, the overall level of public sector employment remains comparably high. 3 September 2008 Credit Analysis Moody’s International Public Finance – Saxony-Anhalt, Land of
  • 4. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of That said, Saxon-Anhalt will continue to face further budgetary challenges. In this regard, significant risk factors are the still modest – though improving – tax base in combination with gradually declining Federal contributions (which will be phased out in 2020) to promote economic development of former East German Länder in accordance with the national Solidarity Pact II, the demographic development, rising interest rates and unfunded pension liabilities. The Land has only recently been able to start accumulating reserves to prepare for these challenges and possible swings in the economic development. Debt Profile High debt burden to decline only gradually Direct debt (excluding companies’ debt) remains very high at €20.1 billion in 2007, or 221% of the Land’s operating revenues. This is almost unchanged from 2006 levels, whereby debt was at 224% but significantly above the 169% of 2000. Although the ratio continues to be very high in an international context, it is in line with the German average (excluding Berlin) of 210% in 2007, but remains above the level of the other eastern Länder. If other indirect debt - i.e. debt of non-self supporting majority-owned companies - and guarantee obligations are included, the ratio rises to 241% of operating revenues. The administration has, however, made renewed efforts to stabilise the budget. Total debt as a % of operating revenues 300.0 259.6 246.8 245.4 240.8 250.0 238.9 220.3 202.4 200.0 185.6 150.0 100.0 50.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 Source: Federal Statistical Office, series 14, issue 2. The 2008 budget should have no additional borrowings, whereas in 2009 a €25 million net redemption is planned. Modest pre-funding surpluses as of 2009 should enable the Land to start reducing its substantial debt. The pace of reduction is nevertheless negligible and may be unsustainable if the economic cycle faces a hard landing, despite the Land’s efforts to prepare for this situation by creating a tax shortfall reserve. In Moody’s view, the likely deterioration of the macroeconomic situation both at federal as well as at the Land’s levels, should call for more stringent debt reduction policies. Active debt management and sound liquidity position ease the substantial debt service requirements In the debt portfolio, foreign currency risks are fully hedged, and outstanding debt has an average maturity of over 10 years of which 80% is at fixed rates, with the rest at variable or semi-variable rates. While this leaves some interest rate risk and the Land has some further open exposure in its derivatives portfolio, we believe the overall risk exposure is moderate. The share of short-term indebtedness is comparatively high, owing to the existence of a CP programme, a unique feature among the German Länder. Consequently, the debt service ratios are extraordinary high, with a level of nearly 60% of operating revenues in 2007. However, use of the CP programme in 2007 exceeded financing needs, a step that was done intentionally to keep the programme 4 September 2008 Credit Analysis Moody’s International Public Finance – Saxony-Anhalt, Land of
  • 5. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of running and to satisfy investor demand. Interest expenses accounted for 10% of operating revenues, in line with other German Länder. The overall amortisation profile, however, appears balanced and the access to capital markets is good, based on a broad set of instruments and a sophisticated state treasury. Access to liquidity is underpinned by the confidence of market participants in the “solidarity system” inherent among the Länder and at the Federal level. In order to bridge intraday needs, Saxony-Anhalt has access to the inter-Länder credit pool (whereby individual Länder offer their surplus cash to each other) as well as its CP programme and credit facilities. Saxony-Anhalt has financial relationships with more than 40 financial institutions. Contingent liabilities appear moderate Saxony-Anhalt has moderate contingent liabilities, mainly in the form of guarantees – totalling €1.739 billion at December 2007 down from €1.830 billion in 2006 – particularly for housing projects and support for small- and medium-sized businesses. Guarantees called in 2007 were small in proportion to the total volume of outstanding guarantees. Overall, these guarantees are on a declining trend; the Land has started to provide access to low-interest loans via the Investitionsbank Sachsen-Anhalt rather than directly supporting projects via guarantees. In addition, the Land retains its joint and several liability of the grandfathered obligations for Norddeutsche Landesbank Girozentrale (NordLB, rated Aa2/P-1, BFSR; C-), in which Saxony-Anhalt owns an 8.25% share while Lower Saxony owns a 41.75% share. Moody’s does not expect these guarantee mechanisms will be needed in the near future as this rating reflects sustainable market positioning among corporate customers in the region, strong liquidity and good capitalisation. Saxony-Anhalt owns (or has shares in) several separate companies, the majority of which are public limited companies (GmbH); some of these receive funds from the Land. The majority have been invested in or established with a view to improving the local infrastructure, economy and environment, as well as providing transportation services or performing social functions. Debt related to these companies is very limited, as is any possible impact on the Land’s budgetary situation. Saxony-Anhalt’s pension obligations are still largely unfunded, as is the case for most German Länder, which could negatively affect creditworthiness in the future, although the Land has set up a pension fund for newly employed civil servants in 2007. Moody’s regards this as a first step towards smoothing the effects on the budget. Governance and Management Factors Significant government budgetary strains persist, although budget discipline has improved with greater control of growth in spending. Budgets are accurate, timely and transparent. The Land shows a competent investment- and debt-management approach and, more broadly, strong institutional capacity. Economic Fundamentals Background With about 2.4 million inhabitants (around 3% of total population), Saxony-Anhalt is the eighth-largest Land of the 16 federal states (Länder) in Germany. Saxony-Anhalt’s economy – restructuring starts to bear fruit While the economy is still in a period of transition, early signs are emerging, indicating that the restructuring efforts are starting to bear fruit: real economic output expanded by 2.1% in 2007, slightly lower compared to the average of other eastern Länder (excluding Berlin) at 2.2% and below the German average of 2.5%. The key drivers are to be found in a continued expansion of the industry sector so far and, marginally, the service sector. Growth at current prices in 2007 of 4.6% was in line with the economic expansion of the other eastern Länder and slightly above the national average of 4.4%. Positive rates of growth were recorded by industry and construction as well as finance, rents, and services to industries. H1 2008 growth rates indicate a real 5 September 2008 Credit Analysis Moody’s International Public Finance – Saxony-Anhalt, Land of
  • 6. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of growth of the regional economy at 2.8% vs. an average of 2,4% for Germany compared to the same period in 2007. However, a continuation of such rates of growth appears to be somewhat optimistic now following the expected technical recession of Germany in Q2 and Q3. Real GDP growth Saxony-Anhalt and Germany 3.5 3 2.5 2 1.5 1 0.5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -0.5 -1 Saxony-Anhalt Germany Source: Federal Statistical Office Key macroeconomic ratios all exhibited growth: the regional Gross Value Added (GVA) grew significantly by 12.1% in 2007 vs. 2006, nearly double the level for Germany as a whole. The GDP per capita was 29% below the German average. The growing momentum of Saxony-Anhalt’s economy started to positively affect the traditionally very high unemployment levels. In 2007 Saxony Anhalt’s unemployment rates dropped to 16% from 19.9% the year before. This is still slightly above the 15.1% of eastern Länder and 9% for Germany as a whole. As of June 2008, the unemployment rate stood at 13.8%. As mentioned, the main driver of the slightly more positive employment situation was the secondary sector. Manufacturing, accounting for 30.6% of local GVA in 2007, was one of the main growth contributors. Following major restructuring since reunification, several modern and high-technology companies have emerged in Saxony-Anhalt. A stronger and increasingly dynamic medium-sized corporate sector has begun to develop, which bodes well for the Land’s prospects in the medium term. Medium-term growth prospects are being enhanced by restructuring and continued transformation of the economic base. The industry sector, in particular, has contributed to this positive development, with a growth rate of 12.1% in 2007. The biggest players include: TOTAL (refinery), the Dow Chemical Company, the EDEKA supermarket chain, National Railway, and postal and telecom companies. Even the construction sector, which has restricted the pace of growth after the reunification boom, kept growing by 1.3% and represented a 5.9% share in local GVA in 2007, still above the national average. A further fall in unemployment rates may indicate that economic growth is at least starting to absorb the very large numbers of unemployed. Labour force participation stood at 76.8% of the working age population (53.1% of all inhabitants, significantly above the German average of 49.9%), and overall employment levels grew 0.6% in 2006, for the first time since the early 1990s. 6 September 2008 Credit Analysis Moody’s International Public Finance – Saxony-Anhalt, Land of
  • 7. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of The service sector grew by merely 0.4% and accounted for 67.6% of regional GVA in 2007. While all sectors of private services grew, the public sector continued to shrink, at a rate of -5.1% in 2006 and -2.3% in 2007, reflecting the regional government’s efforts to consolidate its budget. While the economic restructuring has evidently made progress in manufacturing, the service sector still appears to lag behind somewhat. The restructuring of the economy has left its traces in the population development. In 2006, the Land had a population of 2.44 million vs. 2.47 million the year before, and down from 2.62 million in 2000. The pace of outward migration has slowed recently; however, it still remains potentially negative for the economy and for the budgetary situation, as both the original tax base as well as transfer payments (partly factored on population) depend on population development. Demographic projections see this trend continuing for the foreseeable future, which represents a challenge, especially for a sustainable budgetary development in the longer run. Operating Environment Typical of advanced industrial economies, the operating environment for German RLGs is reflected in the relatively high GDP per capita, low GDP volatility and high ranking on the World Bank government effectiveness index. These characteristics represent a minimal level of systemic risk, as reflected in the Aaa rating assigned to the Federal Republic of Germany. As such, conditions that historically precede national crises that are associated with RLG defaults are not present in this context. Institutional Framework The institutional framework, which encompasses the arrangements determining intergovernmental relations at all levels and jurisdictional powers and responsibilities, is mature and highly developed, with minor changes occurring at a measured pace and in a clear/transparent way. Germany has one of the strongest equalisation systems worldwide, which combines revenue equalisation – both horizontal and vertical – and investment support from the federal government. This scheme protects all Länder against above-average revenue shortfalls, yet limits their revenue flexibility. More than 90% of revenues stem from shared taxes and transfers, and German states do not have tax-rate-setting rights. A regional tax base that grows above the national average would have only a limited effect on the Land’s budgetary performance. Above-average tax revenue growth coincides with decreasing transfer income from the equalisation pool. Debt levels are among the highest in terms of international comparison and some jurisdictions continue to add to their respective stock of debt. 7 September 2008 Credit Analysis Moody’s International Public Finance – Saxony-Anhalt, Land of
  • 8. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Annual Statistics Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % Total revenues [1] 8,992 9,114 9,131 9,514 9,933 Total expenses [2] 10,460 10,099 10,187 10,054 9,817 OPERATING REVENUES Taxes 4,201 53.7 4,387 54.2 4,249 52.1 4,652 53.8 5,045 55.4 Intergovernmental revenues 3,351 42.8 3,442 42.6 3,648 44.7 3,773 43.7 3,852 42.3 of which Subsidies -- -- -- -- -- -- -- -- 3,544 38.9 Transfers 3,351 42.8 3,442 42.6 3,648 44.7 3,773 43.7 308 3.4 Other 276 3.5 258 3.2 262 3.2 218 2.5 202 2.2 of which Fees -- -- -- -- -- -- -- -- -- -- Interest Income 10 0.1 19 0.2 18 0.2 28 0.3 20 0.2 Total operating revenues 7,828 100.0 8,087 100.0 8,159 100.0 8,643 100.0 9,099 100.0 OPERATING EXPENSES Administration and personnel 2,673 32.3 2,829 34.4 2,320 28.4 2,311 27.7 2,215 27.1 Administrative -- -- -- -- -- -- -- -- -- -- Personnel 2,673 32.3 2,829 34.4 2,320 28.4 2,311 27.7 2,215 27.1 Transfers 4,217 51.0 4,075 49.6 4,520 55.3 4,678 56.0 4,197 51.4 Interest expenses 873 10.6 852 10.4 876 10.7 907 10.9 909 11.1 Other 502 6.1 459 5.6 461 5.6 454 5.4 847 10.4 Total operating expenses 8,265 100.0 8,215 100.0 8,178 100.0 8,350 100.0 8,168 100.0 Primary Operating Balance 436 724 858 1,200 1,840 Gross Operating Balance -437 -128 -19 293 931 Net Operating Balance -2,980 -3,788 -5,344 -6,902 -3,496 8 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 9. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % Gross Operating Balance -437 -128 -19 293 931 CAPITAL REVENUES Intergovernmental revenues 950 81.6 965 94.0 910 93.6 829 95.2 786 94.2 Other 214 18.4 62 6.0 62 6.4 42 4.8 48 5.8 of which Assets sales 194 16.7 27 2.6 27 2.8 8 0.9 10 1.2 Repayments from public sector 20 1.7 35 3.4 35 3.6 34 3.9 38 4.6 Total capital revenues 1,164 100.0 1,027 100.0 972 100.0 871 100.0 834 100.0 CAPITAL EXPENSES Capital Investments 316 14.4 236 12.5 159 7.9 153 9.0 259 15.7 Loans 27 1.2 41 2.2 62 3.1 12 0.7 22 1.3 Assets purchases 17 0.8 17 0.9 193 9.6 54 3.2 40 2.4 Transfers 1,835 83.6 1,590 84.4 1,595 79.4 1,485 87.1 1,328 80.5 Other 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 Total capital expenses 2,195 100.0 1,884 100.0 2,009 100.0 1,704 100.0 1,649 100.0 FINANCING DEFICIT/SURPLUS -1,468 -985 -1,056 -540 116 [1] Excludes new borrowings. [2] Excludes debt repayment. 9 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 10. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % DEBT INDICATORS DEBT MOVEMENTS Gross new borrowings 3,388 4,996 6,379 7,945 4,427 Debt repayment 2,543 3,660 5,325 7,195 4,427 Mandatory 2,543 3,660 5,325 7,195 4,427 Early 0 0 0 0 0 Change in debt 845 1,336 1,054 750 0 TOTAL BUDGET BALANCE -623 351 -2 210 116 DEBT STOCK Direct debt 16,662 89.1 18,006 90.2 19,241 90.8 19,302 91.0 20,082 91.6 Short-term 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 Long-term 16,662 89.1 18,006 90.2 19,241 90.8 19,302 91.0 20,082 91.6 Guaranteed debt 1,985 10.6 1,902 9.5 1,871 8.8 1,830 8.6 1,739 7.9 of which self-supporting (A) 118 0.6 118 0.6 124 0.6 124 0.6 123 0.6 Debt of government-owned entities 53 0.3 53 0.3 68 0.3 81 0.4 91 0.4 of which self-supporting (B) 28 0.2 26 0.1 26 0.1 30 0.1 40 0.2 Other (Debt like) 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 Total direct and indirect debt (C) 18,700 100.0 19,961 100.0 21,180 100.0 21,213 100.0 21,912 100.0 Net direct and indirect debt (C- A – B) 18,554 19,817 21,030 21,059 21,749 DEBT SERVICE Interest expenses 873 25.6 852 18.9 876 14.1 907 11.2 909 17.0 Debt repayment 2,543 74.4 3,660 81.1 5,325 85.9 7,195 88.8 4,427 83.0 Total debt service 3,416 100.0 4,512 100.0 6,201 100.0 8,102 100.0 5,336 100.0 10 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 11. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % [1] Internal borrowings. KEY RATIOS AND INDICATORS TOTAL ACCOUNTS Total revenue growth rate [1] (%) 0.88 1.36 0.19 4.19 4.40 Total revenues per capita 3,564 3,654 3,697 3,896 4,090 Total tax revenue growth rate (%) -1.76 4.43 -3.15 9.48 8.45 Total tax revenues/ total revenues (%) 46.72 48.13 46.53 48.90 50.79 Total intergovernmental revenues growth rate (%) -2.00 2.46 3.43 0.97 0.78 Total intergovernmental revenues/total revenues (%) 47.83 48.35 49.92 48.37 46.69 Total expense growth rate [2] (%) 1.83 -3.45 0.87 -1.30 -2.36 Total expenses per capita 4,146 4,049 4,124 4,117 4,042 Total transfers/total expenses (%) 58 56 60 61 56 Financing deficit/surplus as % of total revenues (%) -16.33 -10.81 -11.56 -5.68 1.17 Gross financing deficit [3]/surplus as % of total revenues (%) -44.61 -50.97 -69.88 -81.30 -43.40 11 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 12. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % OPERATING ACCOUNTS Operating revenue growth rate (%) -2.16 3.31 0.89 5.93 5.28 Operating revenues per capita 3,103 3,243 3,303 3,539 3,747 Operating revenues/total revenues (%) 87.06 88.73 89.35 90.85 91.60 Tax revenues/operating revenues (%) 53.67 54.25 52.08 53.82 55.45 Intergovernmental revenues (operations related) /operating revenues (%) 42.81 42.56 44.71 43.65 42.33 Fees/operating revenues (%) -- -- -- -- -- Operating expense growth rate (%) 0.05 -0.60 -0.46 2.11 -2.18 Operating expenses per capita 3,276 3,294 3,311 3,419 3,363 Operating expenses/total expenses (%) 79.02 81.34 80.28 83.05 83.20 Transfers (op. related)/operating expenses (%) 51.02 49.60 55.27 56.02 51.38 Primary operating balance/operating revenues (%) 5.57 8.95 10.51 13.88 20.22 Gross operating balance/operating revenues (%) -5.58 -1.58 -0.23 3.39 10.23 Net operating balance/operating revenues (%) -38.07 -46.84 -65.50 -79.86 -38.42 Financing (deficit/surplus)/operating revenues (%) -18.75 -12.18 -12.94 -6.25 1.27 Gross financing (deficit/surplus)/operating revenues (%) -51.24 -57.44 -78.20 -89.49 -47.38 Tax revenues/operating expenses (%) 50.83 53.40 51.96 55.71 61.77 12 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 13. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % CAPITAL ACCOUNTS Capital revenue growth rate (%) 27.58 -11.77 -5.34 -10.40 -4.25 Capital revenues per capita 461 412 394 357 343 Capital revenues/total revenues (%) 12.94 11.27 10.65 9.15 8.40 Capital expense growth rate (%) 9.16 -14.17 6.64 -15.18 -3.23 Capital expenses per capita 870 755 813 698 679 Capital expenses/total expenses (%) 20.98 18.66 19.72 16.95 16.80 Intergovernmental revenues (capital related)/capital revenues (%) 81.62 93.96 93.61 95.18 94.24 Transfers (capital related)/capital expenses (%) 83.60 84.39 79.39 87.15 80.53 Net operating balance/capital expenses (%) -135.76 -201.06 -265.98 -405.05 -212.01 13 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 14. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % DEBT Total debt growth rate (%) 6.09 6.74 6.11 0.15 3.30 Total debt per capita 7,412 8,004 8,575 8,687 9,023 Total debt/GDP (%) 40.60 42.42 44.71 43.55 42.99 Total debt /total revenues (%) 207.96 219.01 231.96 222.96 220.60 Total debt /operating revenues (%) 238.88 246.83 259.60 245.43 240.82 Total debt /tax revenues (%) 445.12 455.00 498.47 455.99 434.34 Total debt in yrs of gross operating balance (yrs) -42.79 -155.94 -1131.59 72.40 23.54 Net debt [4] growth rate (%) 5.26 6.81 6.12 0.14 3.28 Net debt per capita 7,354 7,946 8,514 8,624 8,956 Net debt/total revenues (%) 206.34 217.43 230.32 221.35 218.96 Net debt/GDP (%) 40.28 42.11 44.39 43.24 42.67 Net debt/operating revenues (%) 237.02 245.05 257.76 243.66 239.03 Net debt/tax revenues (%) 441.65 451.72 494.95 452.69 431.11 Net debt in yrs of gross operating balance (yrs) -42.46 -154.82 -1123.59 71.87 23.36 Direct Debt growth rate (%) 6.62 8.04 6.92 0.38 3.61 Direct Debt per capita 6,625 7,241 7,817 7,937 8,269 Direct Debt/total revenues (%) 185.88 198.14 211.47 203.73 202.17 Direct Debt/GDP (%) 36.29 38.38 40.76 39.80 39.40 Direct Debt/operating revenues (%) 213.52 223.31 236.66 224.26 220.70 Direct Debt/tax revenues (%) 397.87 411.64 454.44 416.65 398.06 Direct Debt in yrs of gross operating balance (yrs) -38.25 -141.08 -1031.63 66.15 21.57 Short-term debt/debt (%) 0.00 0.00 0.00 0.00 0.00 Guaranteed debt growth rate (%) 1.79 -4.18 -1.63 -2.19 -4.96 Guaranteed debt per capita 787 763 757 749 716 Guaranteed debt/total debt (%) 10.62 9.53 8.83 8.63 7.94 Interest expense growth rate (%) 8.93 -2.41 2.86 3.50 0.22 Interest expenses/total revenues (%) 9.71 9.35 9.60 9.53 9.15 Interest expenses/operating revenues (%) 11.15 10.54 10.74 10.49 9.99 14 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 15. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Saxony-Anhalt, Land of 2003 2004 2005 2006 2007 € million realised % realised % realised % realised % realised % Interest expenses/tax revenues (%) 20.78 19.42 20.63 19.50 18.02 Interest expenses/primary operating balance (%) 200.23 117.68 102.18 75.58 49.40 Debt service growth rate (%) 43.68 32.08 37.44 30.65 -34.14 Debt service/total revenues (%) 37.99 49.51 67.92 85.16 53.72 Debt service/operating revenues (%) 43.64 55.79 76.01 93.74 58.64 Debt service/tax revenues (%) 81.31 102.85 145.95 174.16 105.77 Gross new borrowings/total debt (%) 18.12 25.03 30.12 37.45 20.20 Gross new borrowings/net debt (%) 18.26 25.21 30.33 37.73 20.35 Gross new borrowings/debt (%) 20.27 27.67 33.04 40.99 22.04 Gross new borrowings/debt repayment (%) 133.23 136.50 119.79 110.42 100.00 Gross new borrowings/capital expenses (%) 154.35 265.18 317.51 466.26 268.47 Debt repayment/gross operating balance (%) -581.92 -2859.38 -28449.93 2455.63 475.51 Gross foreign currency debt/total debt (%) -- 0.00 0.00 0.00 0.00 Net foreign currency debt/total debt (%) 0.00 0.00 0.00 0.00 0.00 Own source revenues/total revenues (%) 52.17 51.65 50.08 51.63 53.31 Financing (deficit/surplus)-CAPEX/total revenues (%) 8.08 9.86 10.44 12.23 17.77 [1] Excludes new borrowings. [2] Excludes debt repayment. [3] Gross financing deficit/surplus= financing deficit/surplus - debt repayment. [4] Excludes guaranteed debt or other debt to self-supporting enterprises. 15 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of
  • 16. Credit Analysis Moody’s International Public Finance Saxony-Anhalt, Land of Moody’s Related Research Analysis: Germany, July 2007 (104117) Statistical Handbook: Non-U.S. Regional and Local Governments, June 2008 (109113) Special Comment: The Application of Joint Default Analysis to Regional and Local Governments, October 2006 (99025) Rating Methodologies: Regional and Local Governments Outside the US, Updated Rating Methodology, May 2008 (107844) Regionale und kommunale Gebietskörperschaften außerhalb der USA, Aktualisierte Ratingmethodik, Mai 2008 (109240) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Report Number: 111538 Author Associate Analyst Senior Production Associate Massimo Visconti Sarah Kieling Judy Torre © Copyright 2008, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S nPRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” 16 September 2008 Credit Analysis Moody’s International Public Finance - Saxony-Anhalt, Land of