Fitch Affirms Polish City of Rzeszow at 'BBB'; Outlook Stable

Fri Apr 25, 2014 11:47am EDT

(The following statement was released by the rating agency) LONDON/WARSAW/MOSCOW, April 25 (Fitch) Fitch Ratings has affirmed the Polish City of Rzeszow's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB'. Fitch has also affirmed the National Long-term Rating at 'A+(pol)'. The Outlooks are Stable. KEY RATING DRIVERS The affirmation reflects a continuation of the city's strong strategic and financial management and the fairly robust performance of the local economy. However, the ratings also factor in projected debt growth for 2014 and 2015, and the city's still subdued operating results. Rzeszow's sound management is demonstrated by its ability in obtaining high EU and state grants to fund its capital expenditure. EU grants are likely to finance more than 50% of the city's high capex in 2014-2015 (25% of total spending on average). Rzeszow continues to increase the efficiency of its public services delivery and has no plans to use any quasi-debt instruments or to transfer risk or debt to its dependent entities. As a result, it has lower contingent liabilities than most of its Polish peers at only PLN23m at end-2012 (latest available data). Rzeszow is the economic engine of south-east Poland, with a diversified economy and growing private investments in the city's recently expanded catchment area. GDP per capita has risen quickly in the Rzeszow sub-region, in which the city is located, to 81% of the national average in 2011 from 74% in 2007. Fitch believes that the city is more prosperous than its surrounding sub-region. The strong performance of the local economy continues to support growth of the city's tax base and should lead to faster growth of tax revenue than its peers. This, together with the city's commitment to cost control, should support Rzeszow's efforts to improve its operating results in 2014 and 2015. Following planned large investments Fitch expects the city's direct debt to rise to PLN630m by end-2015 from PLN463m at end-2013. However, at less than 75% of current revenue, debt should remain moderate. The city has obtained a PLN300m loan from European Investment Bank, which it will deploy for investments scheduled for 2014 and 2015. The loan's favourable terms such as below-market interest rates, a six-year grace period and 25-year maturity for each tranche, mean debt service pressure on the budget will be limited. Fitch expects Rzeszow's operating results to continue to recover in 2014 and 2015, with the operating margin gradually rising to 8% in 2015 from 5.3% in 2012. This is likely to come from faster growth of operating revenue and firm cost control, which should keep operating expenditure growth below operating revenue growth. In 2013 the city's operating performance slightly exceeded our expectations with the operating balance accounting for 7% of operating revenue, or PLN53.7m in nominal terms (2012: PLN38m). The city's operating balance should, consequently, more than cover Rzeszow's debt service requirements, which are likely to average PLN50m annually in 2014 and 2015. The debt to current balance ratio should stabilise at about 13-14 years during the same period, slightly higher than 2013's 12 years, but still in line with the city's long-term debt maturity. RATING SENSITIVITIES The ratings could be downgraded if Rzeszow's growing debt is not accompanied by improvements to operating performance such that the operating balance materially fails to cover debt service for a sustained period. The ratings could be upgraded if Rzeszow sustains an operating balance that covers its debt service by 1.5x, accompanied by diminishing recourse to debt to finance capital expenditure. Contact: Primary Analyst Maurycy Michalski Associate Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Malgorzata.Socharska@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. 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