FitchRatings Bestätigung von 11 Bundesländern

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RATING ACTION COMMENTARY

Fitch Af rms 11 German Laender at 'AAA'; Outlook Stable

Fri 16 Apr, 2021 - 5:06 PM ET

Fitch Ratings - Frankfurt am Main - 16 Apr 2021: Fitch Ratings has af rmed the Long- Term Foreign- and Local-Currency Issuer Default Ratings of 11 German federated states (Laender) at 'AAA' with Stable Outlooks: Berlin, Bremen, Hamburg, Lower Saxony, Mecklenburg-Western Pomerania, North Rhine-Westphalia, Rhineland-Palatinate, Saarland, Saxony-Anhalt, Schleswig-Holstein and Thuringia. Fitch has also af rmed the Short-Term Foreign- and Local-Currency IDRs at 'F1+' and senior unsecured debt ratings at 'AAA' and short-term senior unsecured ratings at 'F1+'. A full list of rating actions is below.

The ratings of the German Laender's joint bond issues (Laender 40; 42, 43, 45-47 and 50-60) have also been af rmed at 'AAA'.

The af rmations and Stable Outlooks re ect the unchanged assumptions of Fitch's rating approach for the German Laender, under which the ratings are equalised with those of the Federal Republic of Germany (Bund; AAA/Stable/F1+).

Based on a drop in Germany's GDP growth in 2020 and projected recovery starting 2021 due to the coronavirus pandemic, our updated rating case has led to changes in the Laender's individual debt sustainability metrics, with no impact on their IDRs, which remain in line with the Bund's.

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KEY RATING DRIVERS Risk Pro le: 'Stronger'

The German Laender's 'Stronger' risk pro le re ects Fitch's 'Stronger' assessment for all its six sub-factors as detailed below.

Revenue Robustness: 'Stronger'

The Stronger assessment is driven by the high share of stable revenue sources due to the strong and diversi ed tax base and stable transfers from the Bund. We view the Laender as resilient to any potential shocks, mitigating the risk of a shrinking revenue base.

The Laender's main revenue sources consist of common tax revenues (corporate income tax (CIT), VAT and personal income tax (PIT) between the Bund, the Laender, and to a lesser extent, the municipalities. By law the Laender receive 50.0% of CIT and 42.5% of PIT. The shares of VAT have a more complex allocation process and vary marginally yoy.

In 2020, the share was 52.9% for the Laender, 43.0% for the Bund and 4.1% for the municipalities. The common tax revenues accounted for 79.8% of the total tax revenues (excluding sole municipal tax revenues) collected in Germany in 2020.

In 2020, tax revenue accounted for 70% (2019: 75%) of the Laender's total revenues, with PIT and VAT the largest contributors, with 49.3% and 40.3% respectively in 2020, while the more volatile CIT contributed a modest 4.5% in 2020. Over the last ve years, the Laender tax revenue growth was above the level of the national economy.

Revenue Adjustability: 'Stronger'

The 'Stronger' assessment is supported by a strong record of revenue equalisation, an essential part of Fitch's rating approach, which links the Laender's ratings to the Bund's.

An extensive equalisation system and a broad-based solidarity pact compensate for nancial disparity. This equalisation framework requires nancially stronger Laender to transfer part of their above-average tax proceeds to nancially weaker members. The framework partly offsets the differences among Laender's tax revenue base and their

nancial strength.

The most recent reform of the nancial equalisation system (Bund-Laender- Finanzbeziehungen) con rms the stability of revenue equalisation. This is likely to increase transfers from the Bund to nancially weaker Laender and lower the burden of net donor states among the Laender. Fitch views this as credit-positive.

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Expenditure Sustainability: 'Stronger'

The Laender have a prudent record of control of opex. The main spending items consist of administration costs towards tax authorities, education and science and social security, which are counter-cyclical in nature. In times of economic stress, anti-cyclical measures are carried out by the Bund.

Laender have been applying cost-consolidation measures since 2010 to comply with the debt-brake rule starting in 2020. Laender have shown strong spending restraint since 2010 to keep opex growth below that of operating revenue. Cost-consolidation measures are subject to the supervision and control of the German Stability Board (Stabilitaetsrat).

Expenditure Adjustability: 'Stronger'

The Laender have effective budget rules in place and have demonstrated a strong ability to limit expenditure growth ahead of the debt brake. They have a moderate share of in exible spending items, with personal costs and transfers accounting for 69% of opex in 2020. Capex accounted for a moderate 10% of total spending in 2020. Despite the limited exibility in adjusting capex, the Laender have a good record of cost

consolidation to achieve balanced budgets and to keep opex growth below operating revenue growth. They are legally obliged to run their budgets without taking on new net debt from 2020, which Fitch views positively for expenditure adjustability.

Liabilities and Liquidity Robustness: 'Stronger'

German Laender operate in a solid national framework for debt and liquidity

management and show strict market discipline, which Fitch views as credit-positive. As one of the largest subnational and frequent issuers, the Laender enjoy strong access to international capital markets, including Bund-benchmark issues. There is no

concentration risk with the maturity pro les and all foreign-currency debt is hedged as are most of the oating-rate issues. The Laender are therefore not exposed to market volatility and their frequent re nancing needs in a lower interest-rate environment also consistently reduce their interest burden.

The Laender also face large contingent liabilities in the form of debt guarantees on behalf of their development banks and former Landesbanks, as well as their largely unfunded pension liabilities. The risk stemming from their commitments provided to banks is mitigated by adequate assets and the conservative business pro les of their development banks. In addition, the amount of contingent liabilities stemming from the de ciency guarantees provided to former Landesbanks is largely declining.

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Liabilities and Liquidity Flexibility: 'Stronger'

German Laender operate in a strong framework for emergency liquidity support provided by government upper tiers with counterparty risk of 'AAA'. This established and active liquidity management system, together with the Laender's strong access to capital markets and corresponding strong re nancing capacity and appropriate treasury facilities, should prevent delays in the provision of liquidity and support. The liquidity risk of a single Land is avoided through bilateral and mutual agreements linking all Laender as well as the Bund, ensuring their ability to assist one another. Liquidity would only fail to be forthcoming for any given Land in the event of a complete federal

breakdown, in which neither the Laender nor the Bund itself could provide liquidity.

All the liquidity provision facilities underline the strong nancial support mechanism that is anchored in the German nancial constitution, which requires the Bund and the Laender to support any single state in nancial distress. This sub-factor is core to Fitch's rating approach for the German Laender.

Debt sustainability: 'aa' to 'bbb' category

Fitch classi es German Laender as Type A local and regional governments (LRG), whose main spending responsibilities are the administration of tax authorities, education &

science, social security and public safety and their expenditure accounts for a material share of the public-sector expenditure and debt. As quasi sovereign entities, the Laender also show scal imbalances between funds received from the state and

disbursements to municipalities. According to 2020 preliminary results, Laender's total spending was EUR473.1 billion, or 55% of the common expenditure performed by the Bund and the Laender (EUR867.4 billion) in 2020. Their total debt of EUR578.6 billion accounted for 32.5% of the common debt of the Bund and the Laender (EUR1.782 trillion) in 2020.

According to Fitch's rating case, the economic liability burden (ELB, net adjusted debt (+

a pro-rata share of central government debt) /local GDP) - the primary metric of debt sustainability for Type A LRGs, deteriorated in 2020, but we expect it to gradually improve in 2021-2025. Both secondary metrics - scal debt burden (FDB) measured as net adjusted debt-to-operating revenue and the synthetic debt-servicing coverage ratio (SDSCR) - will range between 'aa' and 'b'. These re ect the high overall debt burden of the Laender and their high, although prudently managed, annual debt servicing requirements. All these metrics combine to result in an overall debt sustainability assessment of the German Laender of between 'aa' and 'bbb'.

The 'a' assessment of the State of Berlin is driven by its ELB assessed at 70.2%,

corresponding to the 'aa' category, a debt payback of 50.4x (b), SDSCR of 0.3 (b) and a

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FDB of 181.9% (bbb).

The 'bbb' assessment of the State of Bremen is driven by its ELB assessed at 91.0%, corresponding to the 'a' category, a debt payback of 27.2x (b), SDSCR of 0.4x (b) and a FDB of 323.1% (b).

The 'aa' assessment of the State of Hamburg is driven by its ELB assessed at 47.6%, corresponding to the 'aa' category, a debt payback of 33x (b), SDSCR of 0.4x (b) and a FDB of 143.5% (a).

The 'a' assessment of the State of Lower Saxony is driven by its ELB assessed at 55.1%, corresponding to 'aa' category, a debt payback of 40.3x (b), SDSCR of 0.3x (b) and a FDB of 167.2% (bbb).

The 'a' assessment of the State of Mecklenburg-Western Pomerania is driven by its ELB assessed at 63.5%, corresponding to the 'aa' category, a debt payback of 8.6x (aa), SDSCR of 1.5x (bbb) and a FDB of 119.4% (a).

The 'a' assessment of the State of North Rhine-Westphalia is driven by its ELB assessed at 56.7%, corresponding to the 'aa' category, a debt payback of 24.3x (bb), SDSCR of 0.6x (b) and a FDB of 194.7% (bbb).

The 'a' assessment of the State of Rhineland-Palatinate is driven by its ELB assessed at 56.3%, corresponding to the 'aa' category and a debt payback of 17.9x (bbb), SDSCR of 0.8x (b) and a FDB of 150.4% (bbb).

The 'a' assessment of the State of Saarland is driven by its ELB assessed at 68.5%, corresponding to the 'aa' category, a debt payback of 11x (a), SDSCR of 1.1x (bb) and a FDB of 219.6% (bb).

The 'a' assessment of the State of Saxony-Anhalt is driven by its ELB assessed at 72.7%, corresponding to the 'a' category, a debt payback of 32.3x (b), SDSCR of 0.4x (b) and a FDB of 186.2% (bbb).

The 'a' assessment of the State of Schleswig-Holstein is driven by its ELB assessed at 66%, corresponding to the 'aa' category, a debt payback of 77.7x (b), SDSCR of 0.2x (b) and a FDB of 201.5% (bb).

The 'a' assessment of the State of Thuringia is driven by its ELB assessed at 65.9%, corresponding to the 'aa' category, a debt payback of 18.9x (bb), SDSCR of 0.7x (b) and a FDB of 153.3% (bbb).

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DERIVATION SUMMARY

The German Laender 'AAA' IDRs are linked to the rating of the Bund. The Standalone Credit Pro les (SCP) of the Laender are assessed at 'aaa' for the State of Hamburg; 'aa+' for the states of Lower Saxony, Mecklenburg-Western Pomerania, North Rhine-

Westphalia, Rhineland-Palatinate and Thuringia; 'aa' for the states of Berlin and Schleswig-Holstein; 'aa-' for the states of Saarland (revised up from 'a+') and Saxony- Anhalt; and 'a' for the State of Bremen. This re ects a combination of a 'Stronger' risk pro le for all Laender and debt sustainability ranging from 'aa' to 'bbb'.

The 'AAA' IDRs of the Laender are primarily driven by the stability of the solidarity system that underpins their creditworthiness, irrespective of the key risk factors and debt sustainability assessment.

The solidarity system is enshrined in the German constitution and re ects the institutional framework of the Laender. According to the German constitution, all member states of the federal republic are jointly responsible for supporting a Land in

nancial distress. If a Land experiences "extreme budgetary hardship", it is entitled to nancial assistance from all other Laender and the Bund. This principle has been reaf rmed by the constitutional courts on more than one occasion in the past, most recently in 2006.

KEY ASSUMPTIONS

Qualitative assumptions and assessments Risk Pro le: Stronger, unchanged

Revenue Robustness: Stronger, unchanged Revenue Adjustability: Stronger, unchanged Expenditure Sustainability: Stronger, unchanged Expenditure Adjustability: Stronger, unchanged

Liabilities and Liquidity Robustness: Stronger, unchanged Liabilities and Liquidity Flexibility: Stronger, unchanged

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(applies to all 11 German Laender) Debt sustainability:

State of Berlin 'a' category, unchanged State of Bremen 'bbb' category, unchanged State of Hamburg 'aa' category, unchanged State of Lower Saxony 'a' category, unchanged

State of Mecklenburg-Western Pomerania 'a' category, unchanged State of North Rhine-Westphalia 'a' category, unchanged

State of Rhineland-Palatinate 'a' category, unchanged State of Saarland 'a' category, increased from 'bbb' State of Saxony-Anhalt 'a' category, unchanged State of Schleswig-Holstein 'a' category, unchanged State of Thuringia 'a' category, unchanged

Support: N/A, unchanged (applies to all 11 German Laender)

Asymmetric Risk: N/A, unchanged (applies to all 11 German Laender) Sovereign Cap or Floor: Yes, unchanged (applies to all 11 German Laender) Quantitative Assumptions

Fitch's rating case is a "through-the-cycle" scenario, which incorporates a combination of revenue, cost and nancial risk stresses. It is based on 2016-2020 gures and 2021- 2025 projected ratios. The key assumptions for the scenario include:

Fitch's key assumptions within our base case for 2021-2025 include:

- EUR180 billion of additional (central government) debt in 2021 and EUR66 billion in 2022

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- Increase of tax revenue by 4.5% in 2021 and 3.8% for 2022-2025

- Remaining operating revenue items to develop in line with in ation rates - Opex growth of 3% in 2021 and 2% in 2022-2025

- Capex in line with the last ve years' average

- Debt increase of the single states in line with the nancial results based on the assumptions above

Fitch's key assumptions within our rating case for 2021-2025 include:

- Additional stress of tax revenue by -0.5pp in 2021-2025 compared with the base case - Additional stress of opex by 1pp annually in 2021-2025 compared with the base case - Capex adjustments necessary to achieve a balanced budget

- Debt increase of each Land in line with the nancial results based on Fitch's assumptions above.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The ratings are at the highest level on Fitch's rating scale, and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-A downgrade of the sovereign ratings.

-An adverse change to the solidarity mechanism.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (de ned as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year

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rating horizon; and a worst-case rating downgrade scenario (de ned as the 99th

percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-speci c best- and worst-case scenario credit ratings, visit

https://www. tchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www. tchratings.com/esg

VIEW ADDITIONAL RATING DETAILS

FITCH RATINGS ANALYSTS Guido Bach

Senior Director

Primary Rating Analyst +49 69 768076 111

Fitch Ratings – a branch of Fitch Ratings Ireland Limited Neue Mainzer Strasse 46 - 50 Frankfurt am Main D-60311

Nilay Akyildiz Director

Primary Rating Analyst +49 69 768076 134

Fitch Ratings – a branch of Fitch Ratings Ireland Limited Neue Mainzer Strasse 46 - 50 Frankfurt am Main D-60311

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Nazim Dadashov Senior Analyst

Secondary Rating Analyst +49 69 768076 149

Nilay Akyildiz Director

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Committee Chairperson +1 212 908 0889

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Additional information is available on www. tchratings.com APPLICABLE CRITERIA

ADDITIONAL DISCLOSURES

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International Local and Regional Governments Rating Criteria (pub. 27 Oct 2020) (including rating assumption sensitivity)

Berlin, State of EU Issued, UK Endorsed

Bremen, State of EU Issued, UK Endorsed

Hamburg, State of EU Issued, UK Endorsed

Laender 40 EU Issued, UK Endorsed

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