Fitch Affirms Wielkopolska at 'A-/'A'; Stable Outlook

Fri Aug 1, 2014 12:06pm EDT

(The following statement was released by the rating agency) LONDON/WARSAW/MOSCOW, August 01 (Fitch) Fitch Ratings has affirmed the Polish Region of Wielkopolska's Long-term foreign currency Issuer Default Rating (IDR) at 'A-', Long-term local currency IDR at 'A' and its National Long-term rating at 'AA+(pol)'. The Outlooks are Stable. Fitch has also affirmed the region's Short-term foreign currency IDR at 'F2'. KEY RATING DRIVERS The affirmation reflects Wielkopolska's continued solid strategic and financial management, which together with spending flexibility and a capacity to self-finance investments, supports healthy debt ratios. The ratings take into account the region's moderate direct debt as well as indirect risk from the healthcare sector, which the region may have to financially support in the medium term. The region has a track record of excellent operating performance and Fitch assumes this will continue in the medium term. In its base case scenario for 2014-2016, we expect Wielkopolska's operating margin to be 15%-16%, corresponding to an operating balance of PLN140m, which should comfortably cover debt service (principal repayment and interest) by 2x-3x. For 2013, the region posted a high operating margin at 18.4% (2012: 14.2%), supported by an earlier-than-expected receipt of a VAT reclamation (PLN8m) as well as higher-than-budgeted corporate and personal income tax revenue (PLN13m). Regional development and investment are considered spending priorities. Low fixed costs, as a share in operating expenditure (staff costs: 25%), and relative high capital spending (more than 40% of total expenditure in 2010-2013) allow the region significant flexibility to adjust spending in its budget. This high flexibility compensates for Wielkopolska's limited revenue-raising flexibility as a result of income tax rates being decided by the State. Tax revenue averaged 56% of operating revenue in 2010-2013. Fitch estimates that the region's capex will decline in 2014-2016 to PLN300m a year from PLN600m in 2011-2013 as investments co-financed from the 2007-2013 EU budget taper off. However, capex will still constitute about 30% of total spending. Most of it will be financed by capital revenue (including EU funding) and the current balance. Fitch takes a positive view of the region's approach to maintaining a long and smooth debt profile and to minimising debt-service. We expect that the region's debt will continue to increase, albeit at a slower pace, to around PLN600m in 2015-2016 (2013: PLN441m). However, it will still be moderate by international standards at 65%-70% of current revenue. The debt to current balance ratio is likely to increase to five years (2013: 2.8 years); but should remain much lower than the weighted average debt maturity of above 10 years. Regional healthcare entities may require financial support from Wielkopolska through guarantees, capital injections or loans in the medium term. However, pressure on the budget should be limited and hence should not affect the region's credit rating. In addition, Wielkopolska's strict monitoring of financial performance and on-going restructuring have allowed the sector's finances to improve and be stronger than in many other Polish regions. RATING SENSITIVITIES An upgrade of the Polish sovereign rating, accompanied by a continuation of the region's sound operating performance and declining pressure to fund capex with debt could lead to a similar rating action on Wielkopolska. Conversely, a sustained deterioration in the operating margin to far below Fitch's expectations, or a significant rise of direct debt resulting in weak debt payback of above nine years could trigger a downgrade. Contact: Primary Analyst Maurycy Michalski Associate Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Dorota Dziedzic Director +48 22 338 62 96 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 8 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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