Fitch Affirms Metropolitan Municipality of Bursa at 'BB'; Outlook Stable

Thu Dec 19, 2013 11:53am EST

FRANKFURT/BARCELONA/LONDON, December 19 (Fitch) Fitch Ratings has affirmed Metropolitan Municipality of Bursa's (Bursa) Long-term foreign and local Issuer Default Ratings (IDRs) at 'BB' and its National Long term rating at 'AA- (tur)'. The Outlooks are Stable. KEY RATING DRIVERS The ratings reflect Bursa's strong operating performance that is balanced by its high debt levels, slowing GDP growth and a significant unhedged foreign currency exposure. At end-2012 Bursa's foreign currency debt accounted for 67.8% of its outstanding debt or TRY622.3m. Although the foreign currency-denominated debt has a guarantee from the National Treasury and the lenders are multinationals, it exposes Bursa to significant unhedged foreign exchange risk. In 2008 and 2011 the municipality suffered adverse effects from a depreciation of the Turkish lira. Fitch expects Bursa to continue posting strong operating margins of 45% in 2013-2015, albeit down from 48% in 2012, due to its fairly diversified and dynamic local economy. In 2012 Bursa achieved a 95% realisation of its budgeted revenues. Operating expenditure control and tax revenue growth of 18% yoy led to an improvement of debt coverage metrics. Direct debt growth slowed to 12% in 2012 from 17.2% in 2011 as a result of deficit reduction, strong tax revenue performance and an appreciation of the Turkish lira. Direct debt to current revenue decreased to 132.3% in 2012 (146.1% in 2011). Fitch expects direct debt to stay within 135%-141% of current revenue in 2013-2015. Fitch expects the current balance-to-capital expenditure ratio to improve on average to 70% in 2013-2015 from 65.2% in 2012. The administration has started in 2010 a significant investment programme, which will continue until 2014. The programme is primarily driven by the expansion of the public transport system. Capex as a share of total expenditure averaged 47.1% in 2010-2012. Fitch projects this ratio to stabilise at 40.4% until 2015. Bursa's indirect risk totalled TRY194m at end-2012, stemming from the municipality's five public sector entities. Of this 83% relates to the provider of water services. Debt at the five public sector entities is self-supporting. Similar to other metropolitan municipalities Bursa supports its public sector entities with regular capital injections. In 2012 the city was the fourth-largest contributor of national GDP with a share of 4% and accounted for 3% of the population. Key industries are automotive, textile and food processing. The city is investing in road and transport infrastructure to enhance access to its main historical and cultural attractions. The tax base will benefit from a further diversification of the local economy. RATING SENSITIVITIES A sharp increase in external direct debt, which would lead to a deterioration of the debt servicing capacity, would lead to a downgrade. Sustainable reduction of overall risk, a debt payback below 5 years (2012: 3.5 years) and continuation of strong budgetary performance with not higher than budgeted operating expenditures would be positive for the ratings. KEY ASSUMPTIONS Our base case scenario relies on the following assumptions: -Operating margin to remain on average at 45% in 2013-2015 -Current balance sufficient to cover at least 60% of capital expenditure -Debt to remain at between 135% and 141 % of current revenue until 2015 Contact: Primary Analyst Nilay Akyildiz Director +49 76 80 76 134 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Guido Bach Senior Director +49 76 80 76 111 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 9 April 2013 on 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.