Fitch Affirms Poland's City of Zabrze at 'BB+'; Outlook Stable

Fri Jun 6, 2014 11:36am EDT

(The following statement was released by the rating agency) LONDON/WARSAW/FRANKFURT, June 06 (Fitch) Fitch Ratings has affirmed the Polish City of Zabrze's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and its National Long-term rating at 'BBB+(pol)'. The Outlooks are Stable. KEY RATING DRIVERS Zabrze's ratings reflect the city's tight liquidity and low financial flexibility as debt approaches the new borrowing limit from 2014. The ratings further reflect the growing debt of Zabrze's public-sector companies. Positively, the ratings also take into account Fitch's expectations that its operating performance will rebound in 2014-2015, with its operating balance sufficient to cover debt service. For 2014-2015 Fitch expects Zabrze to report an operating margin at 7%-8% after 2013 results were weakened by a shift of revenue (mainly current transfers) to 2014. The city authorities will continue to balance the need to invest both to attract business and improve living standards with gradual rising of local tax rates. Expected recovery of the national economy in 2014 should also support the city's operating revenue. The city's direct debt will peak at PLN308m in 2014 and stabilise thereafter. This figure does not take into account investments co-financed from EU funds under the new EU budget for 2014-2020. Zabrze's debt service will increase to PLN42m in 2015 from PLN38m in 2014 and PLN34m in 2013. We expect debt coverage to remain at seven to eight years, close to the city's weighted average debt maturity of seven years. We also expect the operating balance to cover debt service by 1.1x in 2014-2015. Fitch expects the city's liquidity to marginally recover in 2014-2015 from its low levels in 2013. We also expect Zabrze to frequently tap its short-term credit line of PLN30m as it did in 2013. Zabrze's flexibility to incur additional debt may be constrained by the government's new formula for borrowing limits. Under the new formula the city's individual limit calculated for 2014-2015 has to take into account historical current balances, which for Zabrze included weaker operating performance in 2011-2013. This may affect the city's borrowing capacity. Fitch expects direct debt to be 45% of current revenue in 2014-2015, compared with 44% in 2013. Indirect risk will peak in 2015 at PLN244m as a result of municipal companies' investments. This will mainly be driven by the financing of the second stage of the waste and sewerage project by the city's company ZPWiK and the bonds issued by the Stadium (SPV) for reconstructing the city's football stadium. However, the risk resulting from ZWPiK project is low due to the company's self-financing capability. Zabrze's payments relating to the stadium project (comprising servicing liabilities towards a domestic bank's equity in a SPV and capital transfers to the SPV for bond redemption) are calculated at about PLN21m annually for 2014-2026 and those figures have been included in the city's multiyear financial plan. RATING SENSITIVITIES Improvement of operating performance on a sustained basis with operating margins at 8%-9% coupled with direct risk stabilisation at 55% of current revenue would lead to an upgrade of ratings. The ratings could be downgraded if the operating margin falls below 2%, leading to debt coverage exceeding 20 years and/or direct risk growth significantly above 55% of current revenue. Contact: Primary Analyst Magdalena Mikolajczak Analyst +48 22 330 62 85 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Dorota Dziedzic Director +48 22 338 62 96 Committee Chair Guido Bach Senior Director +49 69 7680 76 111 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', dated 23 April 2014, are available on www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status here ALL 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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