Research Update: Swiss Republic and Canton of Geneva Upgraded To 'A+' On Debt Reduction; Outlook Stable

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1 December 11, 2008 Research Update: Swiss Republic and Canton of Geneva Upgraded To 'A+' On Debt Reduction; Outlook Stable Primary Credit Analyst: Bertrand de Dianous, Paris (33) Secondary Credit Analyst: Valerie Montmaur, Paris (33) Table Of Contents Rationale Outlook Ratings List 1 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P's permission. See Terms of Use/Disclaimer on the last page

2 Research Update: Swiss Republic and Canton of Geneva Upgraded To 'A+' On Debt Reduction; Outlook Stable Rationale On Dec. 11, 2008, Standard & Poor's Ratings Services raised to 'A+' from 'A' its long-term issuer credit rating on the Republic and Canton of Geneva, in Switzerland. The outlook is stable. The rating reflects Geneva's recent outstanding budgetary performance, largely following higher-than-expected tax revenues and tight cost control, as well as the canton's substantial debt reduction achieved over the past two years. Also supporting the rating is Geneva's wealthy economy, strong commitment to contain expenditure growth, and gradually depleting financing requirements relating to the canton's guarantee of Banque Cantonale de Genève's (A/Stable/A-1) past nonperforming loans. An ad hoc defeasance structure, the "Fondation," manages these assets. These positive factors are partially offset by the relatively high degree of sensitivity of the canton's tax revenues to economic cycles and its high unfunded pension liabilities in the context of the current global economic slowdown and turmoil in the capital markets. Geneva's financial performance has significantly improved over the past two years. In 2008, the canton is set to maintain a high operating surplus (before amortization and provisions) despite the negative impact of Switzerland's federal equalization reform. We estimate Geneva's 2008 operating margin (net of tax proceeds relating to past years) at 8% of operating revenues, flat versus 2007 (compared with 3.4% in 2006). Geneva's balance after capital expenditures has turned positive since 2006, primarily on the back of better operating results and decreasing financing requirements from the Fondation. Excluding one-off revenues, Geneva's surplus after capital expenditures reached a high 5.8% of total revenues in 2007 and is poised to be slightly lower in The canton's high surpluses, together with the proceeds on asset sales to public subsidiaries and the good liquidity position enhanced by Geneva's cash pooling system, have allowed the canton to shrink its ratio of direct debt to operating revenues. We expect this ratio at 144% at year-end 2008, down from from 195% in Tax revenues, the main revenue growth engine for the canton, are sensitive to economic cycles, however, especially corporate tax, which represented 17% of operating revenues in 2007 and show high concentration on just a few large companies. Consequently, we expect tax revenues to shrink somewhat in However, the canton's tax revenue base stands to feel the dent from the current economic downturn from 2010 onward, in our view. We expect the canton's operating margin to contract in the near future. But management's strong commitment to continue reining in costs, albeit less Standard & Poor s RatingsDirect December 11,

3 Research Update: Swiss Republic and Canton of Geneva Upgraded To 'A+' On Debt Reduction; Outlook Stable stringently than in the past, will likely partly offset falling revenues and prevent the canton from posting an operating deficit (before amortization and provisions) in the next two years, as was the case in In addition, significant cash inflows from the tax years, combined with tight cost control, should enable Geneva to stabilize its debt in absolute terms in Compared with operating revenues, it would represent about 150%, or its 2001 level. The rating on Geneva is further constrained by its pension obligations. These are managed by four pension funds, based on defined benefits, and financed by a mix of capitalization and pay as you go. Coverage through reserves of future pension payments for Geneva's largest pension fund (called CIA) stabilized at 72.2% in In 2008, this ratio is likely to decrease significantly owing to negative market effects. Geneva's net financial liabilities (including unfunded pension liabilities) represented 257% of total revenues in 2007, which is high by international standards. Liquidity The canton benefits from extensive short-term facilities, comprising Swiss franc (CHF) 1.25 billion of committed bank lines (with seven counterparties) and CHF1.28 billion of uncommitted lines. Together they represent 37% of estimated 2008 operating expenditures and 1.7x the canton's 2008 estimated long-term debt service. Cash inflows and outflows are well spread throughout the year. With the gradual implementation of the cash pooling system, however, Geneva's share of short-term debt stands to decline to about 5% (versus 6% at year-end 2007 and compared with 10% on average over the past few years). Outlook The stable outlook incorporates our expectations for Geneva's operating margin (before amortization and provisions), although weakening, to remain positive and consequently compatible with the rating. We also anticipate that Geneva will be able to stabilize its debt-to-revenue ratio in the next two years. Strong political commitment to continue tight control of expenditures should help the canton meet these goals, despite less dynamic revenues and heightened pressure on some costs, mostly deriving from the canton's willingness to support the local economy and residents under sluggish economic conditions. If Geneva's net financial liabilities (including unfunded pension liabilities) increase significantly, the rating could come under pressure. Conversely, if the canton continues to improve its budgetary performance and significantly trims its debt burden and unfunded liabilities, we could envisage an upgrade, although this is unlikely at this stage. Ratings List Upgraded Geneva (Republic and Canton of) To From 3

4 Research Update: Swiss Republic and Canton of Geneva Upgraded To 'A+' On Debt Reduction; Outlook Stable Issuer Credit Rating A+/Stable/-- A/Stable/-- Senior Unsecured (2 issues) A+ A Additional Contact: International Public Finance Ratings Europe;PublicFinanceEurope@standardandpoors.com Ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at It can also be found on Standard & Poor's public Web site at select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow (7) Standard & Poor s RatingsDirect December 11,

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