(Source: Info-Prod Research (Middle East))Moody's Investors Service has assigned Aa1 ratingto the City of Sapporo's Series 3 Yen 3 billion bond (Lilac-sai) due2012. At the same time the rating has been placed under review forpossible downgrade, as Moody's considers the appropriateness of thepublic sector support anchor (currently the Aaa Local Currency DepositCeiling), in accordance with the unification of the central government'sforeign and domestic currency ratings at Aa2. This review was nottriggered by a change in City of Sapporo's stand- alone credit profile. The ratings are supported by the city's declining debt burden, fiscal reform activities, sound debt and investment management policies, including for its related entities, and a stable local economy. Sapporo's overall debt has declined over the past four years and measuredJPY 2 trillion (159.8% of consolidated revenues) at the end of FY2007.Interest payments have also declined and amounted to 4.3% of consolidatedoperating revenues in FY2007. The recent decline in debt burden reflectsa sharp reduction in capital expenditures that ensures new debt issuanceis below principal payments each year. Moody's does not believe thatcapital expenditures will ramp up to the levels experienced in the early1990s and therefore, the city's debt burden is expected to declinemodestly over the medium term. The city is also making significant efforts to improve its fiscal outcomes by making cuts to overall expenditures. Financial flexibility islimited, given the city's relatively high dependence on local allocationtax for revenues and the high proportion of social security costs in itsexpenditure base. Still, reform activities undertaken to date haveresulted in improved financial performance. Debt and investment management policies under which the city and itsrelated entities operate are conservative and are supported by explicitprudential guidelines focusing on ensuring financial stability. Forinstance, the city has strict investment guidelines that limit exposureto individual counterparty risks. Moody's views this prudential frameworkas a positive factor underpinning the city's creditworthiness. The city plays an important role as an economic and financial center in Hokkaido Island. Its population is increasing due to migration from other cities in Hokkaido, as individuals seek to enter higher education institutions or pursue employment opportunities. The city's ratings also reflect the application of Moody's Joint-DefaultAnalysis methodology, which incorporates the highest likelihood ofsupport from national institutions should the city near a defaultsituation -- a highly unlikely circumstance. It incorporates, as well, a low likelihood that, if the central government were to apply unorthodox fiscal measures (which Moody's might consider a default) to address fiscal difficulties, such measures mightbe extended to local government local currency bonds. The City of Sapporo is one of 17 designated cities in Japan and has a population of 1.9 million. Its local GDP is JPY 7.1 trillion, according to the most recent statistics. Moody's last rating action with respect to City of Sapporo was taken on May 18, 2009, when the Aaa foreign and Aa1 local currency issuer ratings were placed under review for possible downgrade.

Originally published by Info-Prod Strategic Business Information.

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