Fitch Affirms City of Gdansk at 'BBB+'; Outlook Stable

Tue Oct 22, 2013 11:32am EDT

WARSAW/PARIS/LONDON, October 22 (Fitch) Fitch Ratings has affirmed the City of Gdansk's Long-term foreign and local currency ratings at 'BBB+', and its National Long-term rating at 'AA-(pol)'. The Outlook is Stable. KEY RATING DRIVERS The affirmation reflects Gdansk's strong operating performance, its prudent financial management and effective monitoring of budget, which results in a strong self-funding capacity and healthy debt ratios. The ratings factor in strong liquidity and stable debt expected over 2013-2015. The ratings also take into account projected high, but declining, capital expenditure, persistent pressure on operating expenditure and growing maintenance costs in completed investments. Fitch expects the city to maintain an operating balance at about 10%-11% of operating revenue in 2013-2015, which will allow Gdansk to cover its annual debt-service obligations of PLN145m p.a. by about 1.2x-2x on average. The agency does not expect the debt coverage (debt to current balance) to exceed 10 years, which will be well below the city's estimated long-term debt maturity of 14-15 years and positive for the ratings. Fitch expects Gdansk's capital expenditure to start declining in 2013, as large infrastructure investments approach completion. These large investments should still remain high at PLN900m in 2013 (32% of total expenditure) but are down from PLN1,100m in 2012 (39% of total expenditure), and should continue to fall below PLN500m by 2015. As capital revenue and the current balance will finance the majority of capital expenditure, debt financing needs should remain limited. However, completed investments may put pressure on the budget in the medium term, due to growing maintenance costs. Fitch forecasts that investments may increase Gdansk's direct debt to PLN1,400m by 2015, but the latter should stabilise at 65%-70% of current revenue (PLN1,227m or 64% of current revenue in 2012). This is because Fitch expects revenue to rise based on growth of income and property taxes, supported by the expansion of the city's tax base. Because the majority of Gdansk's debt was drawn from international financial institutions, the city has low funding costs, a long debt maturity and a smooth debt repayment profile. Like other Polish subnationals, Gdansk has historically faced pressure to increase operating expenditure. This is driven mainly by under-funded responsibilities that were transferred to local governments by the state and inflexible spending on education and social care. RATING SENSITIVITIES A downgrade may result from a sustained deterioration in operating performance far below Fitch's expectations or a significant rise in debt resulting in weak debt coverage exceeding 15 years. The ratings may be upgraded if the city maintains sound operating performance for three consecutive years, with an operating margin well above Fitch's expectations, accompanied by direct risk stabilising at below 60% of current revenue. Contact: Primary Analyst Maurycy Michalski Associate Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Dorota Dziedzic Director +48 22 330 62 96 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria outside United States', dated 9 April 2013, are available on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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