Financial Status of Aichi Prefecture October, 2015 Aichi Prefecture
Contents Highlights P2 1. Overview P4 2. Fiscal Profile P10 3. Aichi Prefecture Bonds P14 4. Appendix P20 1
Highlights Outstanding Economic and Industrial Platforms One of the most highly populated prefectures in Japan An economy comparable to that of a country Focus on automobiles with an outstanding concentration of industries Maintenance of Fiscal Soundness One of the highest levels of tax revenue in Japan Firm and sound fiscal standing Ample provision of sinking funds Aichi Prefecture Bonds A leading bond issuer in Japan: JPY332.5bn issuance planned for FY2015 Received the highest ratings among Japanese local government bonds 2
1. Overview Aichi Prefecture
Overview of Aichi Prefecture Aichi Prefecture has the world s leading automotive cluster One of Japan s three biggest metropolitan areas. Nagoya City is the fourth largest in the country Aichi Prefecture Nagoya 2.27 mil Population Nagoya Port Toyota Head Office MIRAI* Osaka Tokyo Chubu Centrair International Airport Japan Tokyo Ranking Aichi Ranking Mikawa Port 127,083 13,390 1 7,445 4 * Source: Toyota Motor Corporation Population (thou) GDP (JPY tr) Production (JPY tr) 500.2 91.9 1 34.4 3 292.1 7.9 13 42.0 1 4
Economic Size and Demographics of Aichi Prefecture Third largest GDP in Japan after Tokyo and Osaka, comparable to that of a country in Europe While Japan s population is on the decline, the population in Aichi continues to rise 2012 GDP of OECD and ASEAN Countries Population Growth (1995 = 100) (2) (USD bn) Country GDP U.S.A. 16,244.6 China 8,232.5 Japan 5,935.9 Germany 3,426.0 France 2,611.2 Poland 489.9 Austria 394.5 Thailand 366.0 GDP Aichi (1) 413.6 109 108 107 106 105 104 103 102 101 100 Aichi Japan 1995 2000 2005 2010 2011 2012 2013 2014 (1) Source: Aichi prefecture s economic accounts, converted at the rate of USD1 = JPY83.08, as of FY2012 (2) Source: Statistics Bureau of the Ministry of Internal Affairs and Communications, Economic and Social Research Institute of Cabinet Office, and Statistics Division of Aichi Prefectural Government 5
Industrial Structure of Aichi Well-balanced industrial structure with manufacturing sector at the core Aichi drives Japan s manufacturing sector, particularly the automotive industry Breakdown of GDP (FY2012) Total Shipments of Manufactured Goods (2013) Others Information and Communication Construction Transportation Real Estate 4% 4% 6% 11% 13% 13% 16% Wholesale/Retail 33% JPY34,359bn Manufacturing Services (JPY tr) 45.0 42.0 40.0 35.0 18.9 30.0 25.0 20.0 17.2 16.0 15.7 14.0 Japan Information and Communication Construction Transportation Others 6% 6% 5% Real Estate 19% 12% 18% 15% 20% Manufacturing Services Wholesale/Retail Source: Aichi prefecture s economic accounts (FY2012, actual and estimate) 15.0 10.0 5.0 0.0 23.1 13.6 3.6 13.0 11.8 10.9 10.4 8.6 8.2 8.2 7.9 14.9 11.3 13.0 12.9 10.0 10.5 7.8 6.4 5.8 6.6 6.4 4.4 1.1 1.0 0.1 1.8 0.4 2.6 2.2 2.4 1.6 1.5 Tokyo Tochigi Fukuoka Hiroshima Mie Ibaraki Saitama Chiba Hyogo Shizuoka Osaka Kanagawa Aichi Transport Equipment Others Source: FY2013 Census of Manufacturers (summary) issued by Ministry of Economy, Trade and Industry 6
Major Corporations Located in Aichi Prefecture The major plants of Toyota Motor Corporation are located in Aichi World-class machine tool manufacturers, the aircraft manufacturers undertaking production of B787 and JR Central (Shinkansen bullet train operator) are also located here Machine tool Automobile (parts) Aircraft Utility Steel 7
Growth of Aerospace Industry Future Growth Industry Center of Aerospace Industry Concentration of Aerospace Industry Production of Boeing 787 35% of the airframe structure, incl. main/center wing boxes and forward fuselage, are produced in the region Boeing 787 Creation of Aerospace Industrial Cluster The Chubu region was designated as a Comprehensive Special Zone for the aerospace industry in December 2011 Aiming to be a world top 3 hub for the aerospace industry Source: Boeing Development of Domestic Small Jet MRJ First test flight scheduled in late October 2015 First delivery in 2017 MRJ Target Aerospace industry output in Chubu JPY700bn (2010) JPY900bn (2015) Aerospace industry employees in Chubu: 15,000 (2010) 20,500 (2015) Source: Mitsubishi Aircraft Corporation 8
2. Fiscal Profile Aichi Prefecture
Aichi Prefecture s Revenue Independent Revenue records one of the highest among Japanese local governments Breakdown of Revenue (FY2015 Initial Budget) Breakdown of Local Tax Revenue (FY2015 Initial Budget) (JPY bn) Local Government Borrowing 329 National Government Disbursements 202 Local Allocation Tax 40 Other Administrative Revenue 272 Others 128 JPY2,482bn yen Local Tax 1,103 (JPY bn) Vehicle Tax 115 Local Consumption Tax 223 Others 114 JPY1,103bn Individual Prefectural Tax 349 Corporate Taxes 302 Reserve Reversal 154 Regional Consumption Tax Settlement 254 Independent Revenue JPY1,783bn (72%) FY 2013 Result Aichi Prefecture 62.5% National Average 51.1% 10
Aichi Prefecture s Revenue Aichi has one of Japan s strongest tax revenue bases reflecting the economic strength of the region FY2015 Local Tax Comparison (Initial Budget) (JPY bn) Trends in Local Tax Revenue (JPY bn) 1,600 1,396 1,500 1,414 1,334 1,200 1,103 961 916 894 926 999 1,119 1,103 800 400 0 570 Aichi Osaka Hokkaido Kyoto Okinawa Prefectural average 280 105 431 1,000 500 0 780 783 747 801 752 753 708 691 704 630 554 372 207 207 203 222 247 302 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Corporate Taxes Others 11
Aichi Prefecture s Expenditure Control personnel expenditure and public work projects to maintain sound fiscal management Breakdown of Expenditure (FY2015 Initial Budget) Trends in key items of Expenditure (JPY bn) Others 604 Personnel Expenditure 693 (JPY bn) 850 (JPY bn) 400 Lending 184 Subsidy 98 Public Works Projects 273 JPY2,482bn Debt Servicing 374 Social Assistance Expenditure 256 800 750 700 650 300 200 100 Public Work Projects JPY273bn (11%) Mandatory Expenditure JPY1,323bn (53%) 600 FY04FY05FY06FY07FY08FY09FY10FY11FY12FY13 FY14 FY15 0 FY 2014 Result Aichi Prefecture 10.3% National Average 15.3% FY 2014 Result Aichi Prefecture 48.6% National Average 44.1% Left: Right: Personnel Expenditure Public Work Expenditure Social Assistance Expenditure Debt Servicing 12
Liquidity: Status of Sinking Fund Japanese local governments hold deposits and marketable securities accounting for a certain percentage of outstanding debt of bullet bonds as a sinking fund Trends in Balance of Sinking Funds S&P s Evaluation of Liquidity 700 600 500 400 300 200 100 (JPY bn) 59 68 75 82 166 218 344 342 394 449 478 530 591 Aichi has exceptional liquidity, in our opinion. We estimate the prefecture s internal cash holdings, measured by free cash and liquid assets, exceeded 150% of its annual debt service requirements (including contributions to its debt payment fund) as of March 31, 2014, which we expect the prefecture to maintain. Also, in our view, the prefecture has strong access to external liquidity, reflecting its close relationship with Bank of Tokyo- Mitsubishi UFJ Ltd., a quasi-commitment line provider that ensures its short-term liquidity, and also Aichi s established position in the bond market. 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 (Source: S&P Report dated April 22, 2015) 13
3. Aichi Prefecture Bonds (APB) Aichi Prefecture
Positioning of Aichi LGBs in Japan Aichi is one of the leading bond issuers in Japan and the third largest Local Government Bonds (LGBs) issuer after Tokyo and Osaka Top Bond issuers in Japan (FY2014) Japan Finance Organization for Municipalities Japan Finance Tokyo Osaka Japan Japan Expressway Holding DBJ Panasonic JBIC SMBC Aichi Saitama Kanagawa Shizuoka Hyogo Hokkaido Fukuoka 475 450 400 383 354 330 330 300 270 264 250 250 671 610 1137 Comparisons of domestic straight bonds excluding JGBs, government-guaranteed bonds and retail bonds. 0 200 400 600 800 1000 1200 (JPY bn) 15
Attractiveness Relative to JGBs Aichi issues its core 10-year bonds on monthly basis Aichi s spreads over JGBs have been stable 10-Year Bond Spread Levels (bp) 14.0 Spread Aichi LGB JGB (%) 1.20 12.0 12.0 1.00 10.0 9.0 9.0 9.0 9.0 0.80 8.0 6.0 4.0 2.0 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 3.0 4.0 4.0 4.0 6.0 6.0 6.0 6.0 6.0 6.0 5.5 5.0 4.5 3.5 2.5 2.5 2.5 2.5 4.5 6.5 6.5 6.5 0.510 0.390 0.60 0.40 0.20 0.0 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 0.00 FY 2012 FY 2013 FY 2014 FY 2015 16
Ratings and BIS Risk Weights Aichi obtained credit ratings from 3 rating agencies Its ratings are the highest among Japanese LGBs and the same as those of JGBs Credit ratings of Aichi Prefecture Risk Weights under BIS Standards JGBs 0% S&P A+ (stable) Stable independent revenue sources and steady financial administration results The same as JGBs and Tokyo Metropolitan Aichi LGBs 0% Government agency bonds 10% 20% Bank debenture bonds 20% Straight bonds 20% or more Zero risk weight for domestic investors in Japan Local government bonds are assigned from 10% to 20% risk weights depending on each regulator R&I AA+ (stable)* JCR AAA* (as of September, 2015) *Japanese domestic rating agencies 17
Historical Issuance Volume(FY2008~) Aichi continuously issues JPY300 to 500bn per fiscal year Historical Issuance Volume from FY 2008 500 (JPY bn) 470 10y 5y Joint Muni10y 20y 30y 2y 7y 15y Retail Bond Other 470 465 450 440 440 400 375 350 330 332.5 300 250 200 150 100 50 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 18
Safety of Local Government Bonds The level of credit risk associated with Japan s LGBs is considerably low I Right to levy taxes as a local body System for Securing the Local Government Bonds II III System to reserve sinking funds Special account for local allocation tax system IV Fiscal Consolidation of Local Governments Law since Apr 2009 Secures the reliability of local government bond redemptions There has been no default on local government bond payments to date 19
FY2015 Public Offering Bond Issuance Plan Plans to issue public offering bonds of JPY332.5bn ( US$2.8bn*) in FY2015. FY2015 Public Offering Bond Issuance Plan (JPY bn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total Joint-LGBs 10 10 10 30 5-year LGBs 20 20 20 10-year LGBs 15 15 15 15 15 20 15 15 15 15 20 15 190 20-year LGBs 10 20 20 Flex term 15y: 15 20y: 10 30y: 10 15y: 10 5 50 Prefectural resident bonds 2.5 2.5 Total 332.5 Concepts for the Plan Continues monthly issue of 10-year bonds as benchmark. Issues a variety of bonds including 5-year and 20-year bonds and the ones for prefectural retail investors. Offers flex term bonds for flexible funding to respond to investor needs. Upsize requests Needs for diversified maturities** * 1USD=119.88JPY as of 30 Sep 2015 ** Aichi has issued 2, 7, 15 and 30-year bonds in the past 20
4. Appendix Aichi Prefecture
Local Government System in Japan National Government - Foreign affairs - National defense - Monetary policy Local Governments 47 Prefectures* 1,718 Cities, Towns, Villages and Special Wards* Serving broader areas and responsible for administrative projects within the prefecture e.g., Aichi, Tokyo, and Osaka Serving respective governmental units within the prefecture and responsible for resident level projects e.g., Yokohama, Nagoya, and Kyoto Local governments are responsible for a wide range of services closely related to the daily lives of citizens such as: Public health Social welfare Education Policing Fire fighting Social infrastructures * as of April, 2015 22
Outline of Tax Exemption for Non-Residents Procedure of tax exemption for nonresident Non-resident investor QFI (i.e., Clear Stream, Euro clear) Specified book-entry transfer institution, etc. (Sub-custodians) Head of relevant tax office for Sub-custodians Starting in 2008, with the Article 5-2 Act on Special Measures Concerning Taxation (Limited to the provisions related to nonresidents and foreign corporations), the interest gains on LGBs owned by non-resident or foreign corporations which settled by the book-entry system are exempted from withholding tax. 23
FY2012A Ordinary Account Settlement Local governments undertake municipal administration in Japan, and the size of a local government is comparable to that of a country under a federal system. Prefectures are engaged in a wide range of administrative services such as providing police service, operating high schools and bearing the costs of elementary and junior high schools. Aichi Prefecture s expenditure for FY2014 amounted to over JPY2.2tr. Aichi has been in the black for 15 consecutive years despite a decline in tax revenue. FY2014 FY2013 Changes FY2014 FY2013 Changes Local Tax 1,139,935 997,618 142,317 Mandatory Expenditures 1,091,441 1,077,941 13,500 Local Transfer Tax 146,083 122,310 23,773 Personnel Expenditures 677,140 663,046 14,094 Local Allocation Tax 79,310 66,483 12,827 Debt Servicing 371,848 373,870 2,022 National Government Disbursements 201,386 227,009 25,623 Social Assistance Expenditures 42,453 41,025 1,428 Local Government Borrowing 337,223 393,266 56,043 Investment Expenditures 230,583 228,073 2,510 Other Revenues 364,407 368,132 3,725 Other Expenditures 925,479 851,656 73,823 Total Revenues 2,268,344 2,174,818 93,526 Total Expenditures 2,247,503 2,157,670 89,833 (JPY mn) Gross Balance 20,841 17,148 3,693 Real Balance 11,743 6,171 5,572 24
Financial Ratios All four key indicators that measure local government s financial soundness are comfortably below the limit levels. Fiscal Health Indicators FY2012 FY2013 FY2014 Early warning Results Results Results Limit (1) Real Deficit Ratio - not applicable to APB) 3.75% (2) Consolidated Real Deficit Ratio - not applicable to APB) 8.75% (3) Real Debt Payment Ratio 15.5% 15.5% 15.1% 25% (4) Future Burden Ratio 244.5% 232.7% 212.7% 400% Details (1) The ratio of "real deficit within the General Account to "standard financial scale". (2) The ratio of "all account-based real deficit" to the "standard financial scale". (3) The ratio of the "general revenue resources appropriated to pay off bonds" to the "standard financial scale". (4) The ratio of "future debts including those of the public-private joint sector as well as expected future debts on the General Account" to the "standard financial scale". 25
Historical Outstanding Volume(FY2001~) Historical Outstanding Volume from FY 2001* 600.0 (JPY bn) 550.0 500.0 450.0 400.0 350.0 300.0 311.4 19.5 331.6 24.8 352.7 38.9 368.7 374.3 380.7 385.4 402.5 50.1 58.3 66.9 74.5 94.9 435.5 133.2 531.8 541.1 521.5 504.3 483.2 462.9 169.2 198.7 227.0 252.7 268.5 281.9 52 Special Bonds** 250.0 200.0 150.0 100.0 50.0 0.0 291.9 306.8 313.8 318.6 316.1 313.7 310.9 307.6 302.3 293.7 284.5 277.4 268.8 263.4 259.2 FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15 Normal Prefecture Bonds (Construction expenses Related) *Based on ~FY14: results / FY15 : budget ** Interim measures for fiscal condition and decline of tax revenue, etc. 26
Contact Aichi Prefectural Government Finance Section, Budget Management Division, Department of General Affairs 3-1-2 Sannomaru, Naka-ku, Nagoya, Aichi, JAPAN 460-8501 E-mail: zaimu-shikin@pref.aichi.lg.jp Website: http://www.pref.aichi.jp/global/en/index.html Bloomberg: AICHI Govt <GO> Tel.: +81-52-954-6045 (dial-in) 27