Rating action

Scope Ratings GmbH (Scope) has today affirmed the City of Trondheim’s local- and foreign-currency long-term issuer and senior unsecured debt ratings at AAA. Scope has also affirmed the local- and foreign currency short-term issuer ratings at S-1+. All Outlooks are Stable.

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Key rating drivers

A well-integrated institutional framework for Norwegian municipalities.

Like all Norwegian municipalities, Trondheim benefits from a mature and well-integrated institutional framework. The key elements of the framework are: i) predictable extraordinary support and bailout practices, with the central government taking control of financial management of those municipalities facing financial difficulties to ensure that financial obligations are met; and ii) comprehensive fiscal equalisation schemes that effectively address capacity and cost disparities among municipalities, ensuring effective crisis response. Scope’s evaluation of the institutional framework for Norwegian municipalities leads to an indicative rating range spanning from AAA to AA-. This assessment underscores a well-structured framework for financial support and comprehensive fiscal equalisation systems, ensuring effective crisis response.

Trondheim’s strong individual credit profile.

Scope’s assessment reflects Trondheim’s robust debt affordability and ample liquidity, resilient budgetary performance, its favourable position among Norwegian municipalities in terms of wealth levels and economic resilience, and its high governance quality. Low transition risks and ambitious environmental policies support the rating.

Trondheim's robust debt affordability and ample liquidity. The city’s low net interest payments are projected to decrease to 1.2% of operating revenue in 2024, down from 1.4% in 2023. This reduction is bolstered by Trondheim's substantial liquidity reserves and financial assets, supported by the income-generating TKK investment fund. Established in 2002 from the sale of the city's energy plant, TKK significantly contributes to the city's investment agenda and policy priorities, ensuring continued financial stability. Trondheim has well-established access to diverse external funding sources, with regular bond issuances on the Oslo Stock Exchange and frequent short-term note issuances. Additionally, state-owned funding sources like Kommunalbanken further enhance the city's financial stability. In 2023, Trondheim’s average total liquidity, including both the treasury and the investment fund, was NOK 2.5bn, effectively covering the city’s short-term obligations.

Trondheim’s resilient budgetary performance. Despite pandemic challenges and cost-of-living pressures, Trondheim maintained a robust budgetary performance, with an average operating margin of around 10% from 2020-2022 and moderate deficits before debt movement. In 2023, the operating margin decreased to 7.6% as revenue grew by 7.3% while expenses surged over 8% due to high inflation and rising social service demand. Investment funds were underutilized by NOK 480m due to project delays. Future years will require strict spending prioritization and structural service changes. Scope forecasts robust but moderated operating margins of 5.8% for 2024, stabilizing around 6.1% from 2025 to 2027. Budgetary performance is supported by higher-than-expected tax revenue growth, government compensation for extraordinary costs, and strong investment fund returns. Despite higher revenues, some service areas, especially child and family services, healthcare, and housing, are overspending compared to the 2023 budget. The 2024-27 financial plan reflects prudent cost control with restrained spending growth. The city’s financial results are expected to show contained deficits before debt movement, averaging around 4% of revenues from 2024-2027, necessitating continued borrowing for investments in education, health, and elderly care.

Trondheim’s high levels of wealth and diverse industrial base. Trondheim, Norway’s third-largest municipality with around 215,000 residents, benefits from high wealth levels and economic resilience. These factors drive consistent population growth of 2,000-3,000 annually through immigration and birth surplus. A strong local labour market further enhances its economic outlook. Trondheim is a key transport link in Norway, connecting the south and north and boosting trade and market access. Its diverse economic activities contribute to economic resilience and steady revenue. As Norway’s Innovation and Technology capital, Trondheim hosts the Norwegian University of Science and Technology, the country's largest university. This strong research environment bolsters the city’s economic adaptability.

Trondheim benefits from robust governance, characterized by transparent and effective policymaking, a prudent budgetary approach, conservative debt management strategies, and clear accounting rules. Trondheim’s effective financial management is highlighted by its good record of executing financial plans, complying with fiscal regulations, and establishing a strategic investment fund that supports the city’s investment agenda and policy priorities. Trondheim's governance framework remains resilient to political fluctuations.

Low transition risks and ambitious environmental policies. Trondheim is a leader in climate-transition readiness among Norwegian municipalities, with climate policies aimed at reducing GHG emissions by 80% by 2030 compared to 2009 levels. The city’s strong adaptive capacity and initiatives, such as emission-free construction sites and fossil-free public transport, highlight its commitment to becoming a climate-neutral, energy-smart, and circular city, effectively managing low transition risks.

Credit challenges relate to a high debt stock, limited revenue flexibility and limited expenditure flexibility.

A high debt burden. Trondheim’s debt level was 112.1% of operating revenue in 2023, comparable to 2021 (112.9%) and lower than 2020 (116.7%). Although high compared to other cities, it is manageable due to the city’s financial assets and investment fund. Scope expects the debt-to-operating revenue ratio to rise to around 125% by 2027 and the city to manage debt accumulation through budgetary discipline aligned with internal financial targets, despite cost pressures from high investment needs. The debt structure includes NOK 14.4bn in bank loans, NOK 6.3bn in bonds, and NOK 1.5bn in short-term notes, with a large share financed through the central government and supported by housing rents and water/waste management fees. NOK 3.5 billion is for on-lending purposes, aiding housing access and investments. Trondheim’s debt is exclusively in Norwegian krone, with nearly half on fixed-term interest rates. Significant portions require yearly rollovers, about NOK 4.6bn as of May 2024. To manage refinancing risks, city regulations limit debt maturing within a year to 30% of the total. These risks are mitigated by substantial liquidity reserves and the city’s practice of accelerating loan amortisations during periods of improved budgetary performance.

Limited revenue flexibility and limited expenditure flexibility. Trondheim's revenue flexibility is limited by a significant reliance on government transfers, which account for about 40% of the city's revenue. These largely unearmarked grants provide some budgetary flexibility. While the central government's adjustments to grants in response to tax revenue growth stabilize overall revenue, they also limit the direct fiscal benefits Trondheim could gain from higher tax revenues. Expenditure flexibility is similarly constrained, with nearly half of the city's operating spending allocated to civil servant salaries and a substantial portion dedicated to social welfare. Capital expenses average around 15% of total spending, reflecting Trondheim's commitment to infrastructure development while managing financial resources prudently.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. Norway’s sovereign rating or Outlook was downgraded or revised to Negative;
    
2. Changes to the Norwegian municipal framework materially weakened municipalities’ integration in institutional arrangements; and/or
    
3. Trondheim’s individual credit profile deteriorated significantly.

Institutional framework assessment

Scope’s institutional framework assessment determines the intergovernmental integration between sub-sovereigns and their rating anchor, which is the sovereign or a higher-tier government. To perform this assessment, Scope applies the institutional framework scorecard (QS1) focusing on six analytical components: i) extraordinary support and bailout practices; ii) ordinary budgetary support and fiscal equalisation; iii) funding practices; iv) fiscal rules and oversight; v) revenue and spending powers; and vi) political coherence and multilevel governance.

Scope considers the institutional framework under which the Norwegian sub-sovereigns operate to display ‘full’ integration for: i) ordinary budgetary support and fiscal equalisation. The institutional framework displays ‘strong’ integration for: i) extraordinary support and bailout practices; ii) funding practices; iii) fiscal rules and oversight; iv) revenue and spending powers; and v) political coherence and multilevel governance. Consequently, Scope’s assessment results in an indicative downward rating distance of up to three notches between Norway’s sovereign rating (AAA/Stable) and the rating of an individual sub-sovereign.

Individual credit profile

Scope assesses the individual credit profile based on quantitative and qualitative analysis of four risk categories: i) debt and liquidity; ii) budget; iii) economy; and iv) governance. These are further complemented by additional adjustments for environmental and social factors.

The outcome of these assessments, as reflected in the application of the individual credit profile scorecard (QS2), is an individual credit profile score of 80 out of 100 for Trondheim.

The mapping of this score to the range defined by the institutional framework assessment results in an indicative rating for the Municipality of Trondheim that is aligned with the sovereign rating, corresponding to an AAA indicative rating.

A review of potential exceptional circumstances that cannot be captured by the institutional framework and individual credit profile scorecards did not lead to further adjustments to Trondheim’s indicative rating. As a result, the final rating corresponds to the indicative rating of AAA.

The results have been discussed and confirmed by a rating committee.

Environmental, social and governance (ESG) factors

ESG factors material to Trondheim’s credit quality are captured by Scope’s rating approach through several analytical areas.

Scope’s assessment of Norway’s sovereign credit quality includes an appraisal of ESG risks as detailed in Scope’s Sovereign Rating Methodology.

Governance considerations are material to Trondheim’s rating and are included in Scope’s institutional framework assessment and its assessment of the municipality’s individual credit profile. These assessments highlight the robust quality of governance alongside the administration’s record of sound liquidity and prudent budgetary planning practices.

The institutional framework assessment captures governance factors under political coherence and multilevel governance, assessed as ‘strong integration’ for the Norwegian municipalities. This reflects extensive inter-municipal and inter-regional cooperation that fosters policy coordination and a balanced, stable governance structure.

The individual credit profile captures governance factors under the quality of governance and financial management, where Trondheim is assessed as ‘stronger’, reflecting its i) buildup of budgetary reserves and substantial liquidity reserves; and ii) regular fulfilment of policy objectives defined in strategic plans.

Social considerations are included in Scope’s assessment of Trondheim’s ‘economy and social profile’, highlighting a healthy labour market, a positive economic structure and favourable demographics.

Long-term environmental developments play a direct role in this rating action as Trondheim excels in climate-transition readiness among Norwegian municipalities.

Rating Committee
The main points discussed by the rating committee were: i) institutional framework; ii) debt burden, liquidity profile and contingent liabilities; iii) debt management strategy; iv) budgetary performance and flexibility; v) regional socio-economic and demographic developments; vi) peer comparison; and vii) environmental and social factors.

Methodology
The methodology used for these Credit Ratings and/or Outlooks (Sub-Sovereigns Rating Methodology, 11 October 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 22 September 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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