May 23, 2014 / 1:31 PM / 3 years ago

Fitch Affirms ZKM Gdansk's Ratings

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(The following statement was released by the rating agency) LONDON/WARSAW/MILAN, May 23 (Fitch) Fitch Ratings has affirmed Poland-based Zaklad Komunikacji Miejskiej w Gdansku Sp. z o.o.'s (ZKM) Long-term local currency Issuer Default Rating (IDR) at 'BBB-' and its National Long-term rating at 'A(pol)'. The Outlooks are Stable. Fitch has also affirmed ZKM's PLN220m tram and PLN60m bus revenue bond programmes and their bonds at Long-term local currency rating 'BBB' and at National Long-term rating 'A+(pol)'. KEY RATING DRIVERS Based on the top-down approach under our public-sector entities rating criteria the ratings of the revenue bond programmes and ZKM are respectively one and two notches lower than the ratings of ZKM's sole owner, the City of Gdansk (BBB+/Stable). The one notch differential between the revenue bond programmes and the City of Gdansk's ratings reflects the lack of an explicit guarantee for the bond programmes issued by the city. Yet, a support agreement links their ratings to that of the city. ZKM's ratings are two notches lower than the city's rating to reflect the lower legal protection of non-bondholders compared with revenue bondholders. The bondholders have a first claim on revenues in the tram and bus venture accounts (VAs) in the amount equal to the next 12 months of bond service obligations. This provides preferential treatment as far as the timeliness of repayment is concerned. In addition the bondholders have a pledge on venture assets, excluding them from the bankruptcy estate, which in case of liquidation subordinates non-bondholders. The multiyear contract for bus and tram transport services between the city and ZKM provide the company with over 90% of its total revenue. The contract complies with EU resolution 1370/2007 and the remuneration for transport service paid by the city covers all ZKM's costs and ensures a reasonable profit for the company. Fitch does not expect any negative changes to the company's business model and to the financing of ZKM under the contract, and assumes stable and predictable inflows for ZKM over the long term. ZKM's investment plan for 2014-2016 foresees spending of about PLN102m in total, which is modest compared with the extensive bus and tram projects worth PLN392m finalised in 2012. The company over the medium term plans to focus on renewing its transportation fleets to maintain a high level of services. Fitch expects ZKM's leverage ratios to continue to improve in line with a rise in EBITDA and progress in bond redemption. At end-2013 gross debt, although high, was 238% of equity, down from 274% in 2012. It accounted for 6.3x EBITDA and debt service coverage (DSCR) was 4.2x, above the contract covenant of 1.1x. Annual inflows to the VAs significantly exceed annual obligations to revenue bond holders and Fitch expects the VAs' liquidity to remain high. In 1Q14 cash paid into the tram VA was PLN29.1m while obligations to its bond were PLN19.9m for the next 12 months. For buses, these figures were PLN30.9m and PLN12.2m, respectively. RATING SENSITIVITIES ZKM's ratings could be downgraded if the links between ZKM and the City of Gdansk weaken. A downgrade of Gdansk's ratings could also impact ZKM. The revenue bonds may be downgraded if their status in the capital structure weakens or if the VA's liquidity deteriorates. An upgrade of ZKM and its revenue bonds may result from an upgrade of the City of Gdansk's ratings, assuming ZKM's and its revenue bond programmes' links with the city remain as strong or from an explicit guarantee by the sponsor. 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 Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Additional information is available on Applicable criteria, Applicable criteria, 'Rating of Public Sector Entities Outside the United States', dated 4 March 2014 and 'Revenue-Supported Rating Criteria', dated 12 June 2013, and are available on, are available on Applicable Criteria and Related Research: Revenue-Supported Rating Criteria here Rating of Public-Sector Entities - Outside the United States here 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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