Fitch Affirms Metropolitan Municipality of Izmir 'BBB-'; Outlook Stable

Fri Jun 13, 2014 11:35am EDT

(The following statement was released by the rating agency) FRANKFURT/BARCELONA/LONDON, June 13 (Fitch) Fitch Ratings has affirmed the Metropolitan Municipality of Izmir's (Izmir) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-'. The National Long-term Rating has been affirmed at 'AA+(tur)'. The Outlook is Stable. KEY RATING DRIVERS The ratings of Izmir reflect its strong operating margins, wealthy economy and expected reduction in liabilities. The ratings also reflect Izmir's increasing and high capex needs and its unhedged foreign currency-denominated debt. Fitch expects Izmir to continue to post strong operating margins of 55%-60% in 2014-2016, driven by its buoyant and well-diversified local economy. The new responsibilities attached to the enlargement of the Metropolitan Municipalities area to the province border are unlikely to generate significant additional tax revenues, due to a smaller population in the expanded area, but are nevertheless likely to result in an increase in capital expenditure. Izmir faces some foreign currency risk as 47% of its debt is unhedged. Debt grew 18.4% in 2013 to TRY831.3m. The increase in debt was mainly driven by a sharp depreciation of the Turkish lira in 2013 (see 'Turkish Subnationals: FX Volatility Manageable at Current Levels' on www.fitchratings.com) and new euro-denominated borrowing from the French Development Agency for the purchase of ferry boats for intercity transportation. However, Fitch expects direct risk to decrease to about 30% of current revenue by 2016 (assuming that there is no further sharp depreciation of the lira) from around 40% in 2013. The agency forecasts direct risk-to-current balance would remain below one year in 2014-2016 as Izmir begins to amortise its direct debt. Contingent liabilities of Izmir are growing moderately due to increasing public services provided by public sector entities (PSEs). Eshot (the bus transport entity) and Izsu (water distribution and sewerage) are two PSEs of Izmir, which together with eight municipal companies, are majority-owned by the city. They have mostly demonstrated unbalanced budgets, requiring considerable capital injections and transfers from the municipality. The city also provides guarantee for its train transport entity, which amounted to TRY153m in 2013. Izmir's direct risk increases to 63% of current revenue when the debt of its PSEs and guarantees are included. In 2014 the jurisdictional area of Izmir was enlarged to include its province, which resulted in an increase of 96% of its land area to 12.007sq km but only by 13.2% of its population to 4.1 million. As the city aims to improve the infrastructure and services in the new enlarged metropolitan area Fitch expects capital expenditure to increase but this is unlikely to be matched by a corresponding rise in tax revenues as expansion of the tax base is more limited. Izmir has Turkey's third-largest population (4.06 million in 2013) with wealth indicators above the national average. The city is located on the Aegean Sea Coast and is an important transport and industrial hub. Its dynamic socio economic profile and high standard of living exposes it to migrant flows, resulting in the unemployment rate (2012: 14.8%) being persistently above the national average (9.2%). RATING SENSITIVITIES A downgrade of Turkey's (BBB-/F3) foreign currency IDRs would prompt a downgrade in Izmir's foreign currency IDR. Further, a sharp increase in its direct debt by more than 35% and/or increase in its foreign currency-denominated debt in the light of increasing capex needs, leading to a deterioration of debt servicing metrics, could also lead to a downgrade. Easing of the contingent liabilities and continuation of financial strength, coupled with lower-than-budgeted operating expenditure and an upgrade of the sovereign, would be positive for the ratings. Contact: Primary Analyst Nilay Akyildiz Director +49 76 80 76 134 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Fernando Mayorga Managing Director +34 93 323 8407 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 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, "International Local and Regional Governments Rating Criteria outside United States", dated 23 April 2014 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. 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