Rating action

Scope Ratings GmbH (Scope Ratings) has today affirmed the Erftverband’s long-term issuer and senior unsecured debt ratings at A+. Scope has also affirmed the short-term issuer ratings at S-1+. All ratings are expressed in both local and foreign currency. All Outlooks are Stable.

The A+ rating of the Erftverband reflects the following factors which support its creditworthiness: i) its high regional systemic importance as a water management association in North Rhine-Westphalia (AAA/Stable), operating as a public law corporation (Körperschaft des öffentlichen Rechts), due to its central role in managing raw water for the regional water supply, wastewater disposal and critical infrastructure; ii) stable and predictable revenues derived from legally mandated membership fees; and iii) its natural regional monopoly over the entire course of the river Erft.

However, the rating also takes into account several challenges: i) an increased debt and interest burden; and ii) high investment needs due to the early lignite phase-out and impacts from climate change, such as more frequent extreme drought or flooding.

Rating rationale

Close integration with the public sponsors. The Erftverband’s A+ ratings are supported by its close strategic, operational and financial integration with its member cities, municipalities and districts.

First, the Erftverband operates as a corporation under public law in the state of NRW under the "Gesetz über den Erftverband" (Erftverband Law). The corporate objective of the Erftverband and its public-law mandate are regulated by the Erftverband Law. Tasks include researching and monitoring water management conditions in connection with lignite mining, the management of water discharge including equalising water flow and securing flood runoff, the supervision of groundwater levels and the maintenance of surface waters, the management of raw water for the regional water supply to the population and the economy, as well as wastewater disposal. The Erftverband thus provides essential public services on behalf of the public sponsors, which serve to implement political goals and are not profit-maximising. As it is a member-based organisation that regulates its tasks in self-administration, the association has no ownership structure.

Second, as a public corporation, the Erftverband has a special legal status which legally exempts it from insolvency procedures. Any changes to the entity’s legal form are only permissible via a legal act of the federal state of NRW. Scope deems this scenario to be unlikely. Members are legally obliged to pay contributions to ensure a stable financial management. The majority of member contributions is paid by cities, municipalities and districts located along the river Erft. Together, these therefore represent the public sponsor of the Erftverband for Scope’s rating approach. Other members include lignite mines, power plants, water supply companies, agriculture, as well as industrial and commercial enterprises with relevant wastewater volumes.

Finally, the financing model of the Erftverband is primarily based on member fee contributions which accounted for approximately 86% of revenues in 2023. 95% of the member contributions are provided by cities, municipalities and districts, with ten members accounting for more than half of the contributions. The high share of membership contributions from the public sponsors is due to over 82% of the fee income in 2023 being allocated to wastewater disposal. According to the Erftverband Law, members are obliged to pay their contributions in advance on a quarterly basis. These contribution payments are therefore fundamental for the creditworthiness of the Erftverband.

High level of control. The A+ rating also reflects the high level of control exercised by the public sponsors and the supportive governance framework that ensures stable revenues. As the central decision-making body, the Assembly of Delegates consists of a total of 102 members. The allocation key to determine which member groups are represented with how many delegate seats results in the cities, municipalities and districts occupying the majority of seats (71 out of 102) although they only make up 48 of the total 274 members. The Erftverband Law requires the assembly of delegates to decide on the business plan for each financial year. This determines the total amount of loans to be taken out, the commitment appropriations and the maximum amount of loans to secure liquidity. The business plan must be balanced and submitted to the supervisory authority. In the event that the business plan is no longer balanced, a new plan with amendments must be prepared without delay. The public sponsors thus exercise a high degree of control over the governance of the Erftverband while providing most of the financing through membership fees.

High strategic relevance. The strategic relevance of the Erftverband to the public sponsors is an additional supporting rating factor. The Erftverband has an important strategic role for the cities, municipalities and regions along the river Erft with its key position of managing raw water for the regional water supply and wastewater disposal. Through the anchoring in the state law for NRW and the specifications in the Erftverband Law, the mission of the organisation is clearly set in the public interest.

The geographic conditions secure the Erftverband a regional, natural monopoly position and make a change in the distribution of tasks to other water management associations unlikely. Since its establishment as a public corporation in 1959, the Erftverband's area of competence has expanded. The association is responsible for the entire course of the Erft and has also assumed responsibility for smaller waterways and tributaries.

Finally, the A+ rating takes into account a supplementary analysis of the fundamentals of the Erftverband, including its business and financial risk profile.

Low business risk, appropriate mitigation. The Erftverband’s business profile benefits from its regional natural monopoly and largely regulated market environment. It is further supported by stable and predictable revenue flows, with regular adjustments in membership fees to ensure cost coverage. Risks stem from the consequences of climate change, including the increasing frequency of droughts and floods, which could also result in changes to its legal mandate, as well as increased investment needs related to opencast mining. In response to these risks, the Erftverband has accumulated appropriate capital reserves. In addition, it maintains comprehensive insurance which helps to mitigating risks from external shocks, including extreme weather events.

Slightly elevated financial risks but effective debt management. Scope assesses risks in the financial profile of the Erftverband as slightly elevated. The organisation has a below-average equity ratio and higher indebtedness compared with other water management associations in NRW. As of 31 December 2023, all but one of the outstanding variable-interest loans were hedged against rising interest rates, with the final loan having been converted into a fixed interest rate loan in 2024. As bank borrowings mainly finance property, plant and equipment, the higher debt reflects the growing investment volume for the modernisation and maintenance of the Erftverband’s technical equipment and machinery. This reduces the risk of an investment backlog and more costly repairs in the medium term. Compared to other water management associations in NRW, the Erftverband has a relatively stable interest cover, a high debt ratio and an elevated interest burden. The EBIT interest cover rose to 1.9x in 2022, up from a long-term average of 1.3x through 2021, as insurance payouts boosted earnings, bringing the interest cover ratio to one of the highest among other water management associations. While the Erftverband's debt-to-assets ratio (59% in 2022 and 2023) has remained stable in recent years, it is higher than the average for similar water management associations in NRW (50%). Finally, the Erftverband faces increased interest costs due to its elevated debt level. Its interest expenses relative to liabilities to credit institutions are the second highest (1.9%), behind the Ruhrverband (4.3%).

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s assessment that the risks to the Erftverband are balanced over the next 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. The average credit quality of the public sponsors were upgraded.
    
2. Changes in the legal framework would significantly strengthen the investment capacity of the Erftverband or the liability guarantees of the public sponsors; and/or
    
3. There were a significant and sustained improvement in the Erftverband’s indebtedness metrics.

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

1. The average credit quality of the public sponsors were to be downgraded;
    
2. There were unfavourable legal changes to the financing model through member contributions; and/or
    
3. There were a significant deterioration in the business and/or financial risk profile of the Erftverband.

Qualitative Scorecards (QS1, QS2)

Provided that the GRE benefits from a sufficiently high level of integration with the public sponsor, Scope applies the Top-Down approach that takes the public sponsor’s rating as the starting point and then negatively adjusts it by up to three notches (although exceptions can apply).

Scope applies a ‘Top-Down’ approach (QS1) in assessing the creditworthiness of the Erftverband, which takes the public sponsor’s rating as the starting point. The starting point for the Erftverband is a credit estimate of AA, used to assess the creditworthiness of its 48 public sponsors, weighted according to their membership fee contributions. The rating approach applied by Scope is underpinned by the legal obligation for the sponsors to remain members and the stability of membership fee contributions.

The adoption of the top-down approach (QS1) reflects a strong level of integration between the Erftverband and the public sponsors resulting from: i) a ‘High’ integration assessment for Legal status, ii) a ‘High’ integration assessment regarding the Erftverband’s Purpose & activities; and iii) a ‘High’ integration assessment on Financial interdependencies. Given the Erftverband’s legal form as a public corporation, Scope does not assess Shareholder structure in line with its methodology.

The initial rating is then adjusted negatively, based on the assessment of i) ‘High’ Control and regular support from the public sponsors; and ii) ‘Medium’ Likelihood of exceptional support (QS2). The assessments under QS2 lead to an indicative AA- rating for the Erftverband.

Scope assesses Control and regular support for the Erftverband as ‘High’ as a result of: i) a ‘High’ level of control by the public sponsors over Strategic and operational decision making; ii) a ‘High’ control over its Key personnel, governing & oversight bodies; and iii) ‘High’ Ordinary financial support.

Scope assesses the Likelihood of exceptional support at ‘Medium’, reflecting: i) a ‘High’ assessment for Strategic importance for the public sponsor; ii) ‘Medium’ Substitution difficulty; and iii) a ‘Medium’ assessment on the political and reputational Default implications in the event of a hypothetical default.

The rating assessment also includes a supplementary analysis of the business and financial risk profile of the Erftverband. The supplementary analysis leads to a downward notching from the indicative AA- rating of one notch, and thus to the final A+ rating of the Erftverband.

The results were discussed and confirmed by a rating committee.

Environment, social and governance (ESG) factors

Scope considers the following ESG factors in the rating analysis.

Governance factors are relevant for the rating of the Erftverband and are included in the assessment of the integration with the public sponsors and in the assessment of the Erftverband’s business and financial risk profile. These factors are supported by the high quality of management and governance structures, and sound and conservative liquidity and financial management.

Social and environmental factors are included in the assessment of the strategic relevance of the Erftverband. The association is not only responsible for water supply and wastewater disposal, but also for regulating water runoff and groundwater levels, maintaining surface waters, waste disposal and preventing ecological damage. After the flood disaster of July 2021, the Erftverband facilitated the coordination between municipalities to cooperate on inter-municipal flood protection. The aim of this cooperation is to reduce the flood risk through increased coordination and the development of protective measures in all municipalities. The flood protection concept is to be developed by 2025.

Rating committee
The main points discussed by the rating committee were: i) integration with the public sponsor, ii) control and regular support assessments, iii) likelihood of exceptional support, and iv) stand-alone factors under the supplementary analysis and business and financial risk profiles.

Methodology
The methodologies used for these Credit Ratings and/or Outlooks, (Government Related Entities Rating Methodology, 4 September 2024; Sub-sovereign Rating Methodology, 11 October 2023), are 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Senior Director
Person responsible for approval of the Credit Ratings: Jakob Suwalski, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 September 2022. The Credit Ratings/Outlooks were last updated on 29 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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