(The following statement was released by the rating agency)
Nov 19 -
-- Poland's third-largest city, Lodz, has been applying measures to
contain costs that, in our view, should improve operating performance in
2012-2014 in line with our previous expectations.
-- At the same time, the city is expected to enlarge its deficits after
capital account and increase debt burden to implement as many EU-sponsored
projects as possibly during the next three years.
-- We are therefore affirming 'BBB+' ratings on the City of Lodz.
-- The stable outlook reflects our assumption that the city's
consolidation measures and debt refinancing program will help strengthen its
self-funding capacity and liquidity while mitigating a gradual, but steady,
increase in tax-supported debt.
On Nov. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+'
rating on the Polish City of Lodz. The outlook is stable.
The rating on Lodz, which is Poland's third-largest city, reflects our view of
the evolving, but sound institutional framework for local government in
Poland. Lodz also profits from substantial investments in transport
infrastructure and smooth debt repayment schedule.
The rating is constrained by the city's weak liquidity, relatively weak
budgetary performance, low budgetary flexibility, and a planned increase in
financial debt at the city's companies.
We consider that recent adjustments introduced to the Polish LRGs'
institutional framework have encouraged large cities to balance spending and
revenues, employ long-term financial planning, limit tax-supported debt, and
improve self-funding capacity in the medium term.
As a result, we expect the city to increase its operating surplus from the
current very low level, which will allow it to maintain recourse to the
capital markets beyond 2014. After 2014, the city's debt service should not
exceed its three-year average operating surplus plus privatization receipts.
The city has already raised rent fees and public transport ticket prices, and
continues to rationalize spending.
In our base-case scenario, we forecast that the city's operating surplus as a
percentage of operating revenues will increase to a still-modest 4% on average
in 2012-2014 from the low 0.7% recorded in 2010-2011.
Efforts to improve budgetary performance are constrained by Lodz's limited
budgetary flexibility, in our view. The central government controls most
revenue sources, and operating spending is largely related to indispensable
public services. The deficit after capital accounts will be contained by a
rising operating surplus and by substantial cofinancing from the EU and state
and private investments in transport infrastructure, primarily for an
underground railway station.
Nevertheless, in our base-case scenario, the city's high infrastructure needs
will cause it to increase capital expenditures to an annual 20% of
expenditures in 2012-2015. In 2010 and 2011, capex was low at an average 14.7%
because of uncertainty over strategy, combined with project delays following a
change in management in 2010. As a result, we anticipate that Lodz's average
deficit after capital accounts over 2012-2014 will increase to 8.6% of total
According to our base-case scenario, widening deficits would increase
tax-supported debt to a relatively large 98% of consolidated operating
revenues in 2014 from 74% in 2010. The city's reliance on long-term borrowings
somewhat mitigates the increase in debt service. Owing to the city's limited
debt-raising capacity, we expect municipal companies will accelerate
borrowing, which also explains the trend for tax-supported debt to rise. We
will closely monitor this trend going forward; a typical, and in our view
risky, way to overcome borrowing limits in other Central and Eastern European
countries has been to switch the debt-raising mandate to the company level.
We assess Lodz's liquidity as "negative." The city maintains a low level of
liquid assets. According to our methodology, the city's available cash,
combined with an available committed facility, covers only about 50% of the
debt service falling due within the next 12 months. We anticipate that due to
the relative resilience of the Polish banking sector and its capital market,
the city benefits from satisfactory access to bank lending.
In the second half of 2011 and the first half of 2012, the city's average
available liquid assets--including cash on accounts, its credit line, and
other contracted, but undrawn, credit facilities--accounted for about Polish
zloty (PLN) 173 million. The city has increased its committed facility with a
local bank to PLN200 million in 2012 from PLN100 million in 2011. According to
our methodology, we apply a 50% haircut to Lodz's free cash and committed
lines because both are with an unrated bank, Getin Noble Bank S.A.
That said, the city's liquidity coverage ratio may improve. Lodz has been
undertaking a massive refinancing of its debt ahead of the 2014 implementation
date for new national municipal borrowing regulations. Despite this
refinancing, in our base-case scenario, we assume that after 2014 the city's
cash and committed facilities (after haircuts) will cover less than 80% of
debt service falling due within the next 12 months.
The city is moderately exposed to interest-rate and foreign-exchange rate
risks. For almost all borrowings, interest is linked to variable short-term
interest rates, which we view as a credit weakness, and about 11% of debt is
denominated in euros.
We consider that the city enjoys only satisfactory access to external
liquidity, owing to weaknesses of the domestic banking sector, which are
reflected in our BICRA score of '5' (a score of '1' indicates the lowest risk
and '10' the highest). For more details, see "BICRA On Poland Maintained At
Group '5'," published Nov. 9, 2011, on RatingsDirect on the Global Credit
The stable outlook reflects our assumption that consolidation measures and
debt refinancing program, as currently envisaged by the city, will help Lodz's
management strengthen its self-funding capacity and liquidity while mitigating
a gradual, but steady, increase of tax-supported debt.
We could lower the rating within the next 24 months if, as in our
downside-case scenario, management fail to curb its operating expenditure
growth. This would lead to a higher deficit after capital account and heavier
indebtedness compared with our base-case scenario. We could also lower the
ratings if there was a significant increase in the city's deficit after
capital accounts of more than 10% of revenues and the liquidity position
Conversely, we might raise the rating with the next 24 months if, as in our
upside-case scenario, the city managed to achieve stronger budgetary
performance compared with that envisaged in our base-case scenario and further
improve its liquidity position. Our upside case assumes that operating
surpluses reach about 9% of operating revenues on average in 2012-2014 while
the balance after capital accounts stays marginally negative during this
period. At the same time, it assumes that average cash and available committed
facilities, with the haircut applied, would reach the level of debt service
falling due within the next 12 months.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
-- Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010
-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S.
Local And Regional Governments And Related Entities And For Rating Their
Commercial Paper Programs, Oct. 15, 2009
Lodz (City of)
Issuer Credit Rating BBB+/Stable/--