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

Fri Jul 18, 2014 12:51pm EDT

(The following statement was released by the rating agency) WARSAW/LONDON/MOSCOW, July 18 (Fitch) Fitch Ratings has affirmed the Polish City of Szczecin's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and its Short-term foreign currency IDR at 'F2'. KEY RATING DRIVERS The ratings reflect Szczecin's prudent financial management and rationalisation of its operating spending, its self-funding capacity and healthy debt ratios. The ratings also factor in high liquidity and moderate direct debt. They also take into account growing indirect risk, persistent pressure on operating spending and growing maintenance costs from completed investments. Fitch expects the city to maintain its robust operating performance with an operating margin of 11% per annum in 2014-2016, which will allow to cover its annual debt service of PLN70m by about 3x on average. This will be driven by the city's control on operating spending growth, and by increasing revenue from local taxes and fees, supported by the expansion of the city's tax base. Fitch forecasts Szczecin's direct debt will be moderate at 60% of current revenue in 2014-2016, (2013: PLN935m; 57%), as almost all medium-term debt financing needs were met in 2012. Fitch estimates that the city's capex for 2014-2016 will average PLN420m a year (20% of total spending). Over 50% of the capex will be financed by capital revenue, as the city has secured EU grants for its investments. However, completed investments may put extra spending pressure on the city's budget in the medium term due to growing maintenance costs. Fitch projects that Szczecin's debt service and debt-to-current balance ratios will remain healthy in 2014-2016. The debt-to-current balance ratio may increase to seven years, which is well below the average debt maturity estimated by Fitch of 20 years. The city is exposed to interest rate and FX risks, as almost all of Szczecin's debt carries floating rates (80%) and 44% is euro-denominated. However, the city's prudent budgetary approach takes into account of these risks so that any adverse impact should be manageable. Fitch regards the city's strong liquidity buffer and liquidity management practices as a positive rating factor. Cash in the city's accounts plus liquid deposits averaged above PLN130m at the end of each month in 2013, yielding PLN6.5m in interest income. The city has not had the need to use its liquidity credit line of PLN150m. Fitch expects Szczecin's indirect risk from municipal companies' debt to increase to about PLN800m in 2015 from PLN612m at end-2013. However, such contingent risk is mitigated by the municipal companies' capacity to repay their debt by themselves. Although Szczecin may support its companies through capital injections, they should be small in relation to the city's budget. As with other Polish subnationals, Szczecin's operating expenditure has historically faced growth pressure. This is driven mainly by under-funded responsibilities that were transferred to local governments by the State and the structural inflexibility of operating spending. RATING SENSITIVITIES A downgrade could result from a weakening of the city's operating margin to below 7%, accompanied by debt rising well above Fitch's projections, resulting in significant deterioration in the debt-to-current balance ratio to beyond 10 years. Szczecin's rating could be upgraded if the city sustainably strengthens its operating performance, with an operating margin above 12% accompanied by stabilising direct debt following containment of capex in the medium term. Contact: Primary Analyst Magdalena Mikolajczak Analyst Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Maurycy Michalski Associate Director +48 22 330 67 01 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', 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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