April 25, 2014 / 3:46 PM / 4 years ago

Fitch Affirms City of Kielce at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/PARIS, April 25 (Fitch) Fitch Ratings has affirmed the Polish City of Kielce's Long-term foreign and local currency Issuer Default Ratings (IDR) 'BBB-' and National Long-term rating at 'A-(pol)'. The Outlook is Stable. KEY RATING DRIVERS The rating affirmation reflects Kielce's improved operating performance and adequate debt ratios, as a result of effective financial and operating management. It also takes into account the city's moderate direct debt and limited borrowing requirements as financing for the latest investment cycle has mostly been obtained. The ratings also factor in expected increase of Kielce's indirect risk over the medium term. Fitch expects the city to maintain satisfactory operating performance in 2014-2016, with the operating margin averaging 7%. This will be supported by the city authorities' prudent financial policy and continued cost control and the expected growth of the national economy. In 2013 Kielce's operating performance improved substantially, with an operating margin of 8.4%, compared with the average for 2009-2012 of 5.3%. To limit growth of the more rigid expenditure, the city's authorities are closely monitoring spending on employment, optimising the school network, organising collective tenders for utilities and modernising public buildings. These measures have allowed Kielce to keep operating spending increase below operating revenue growth for the past two years. Fitch expects this to continue. Fitch forecasts Kielce's direct debt in 2014-2016 to remain moderate, at 60% of current revenue, given its smaller debt appetite than most of its peers. The agency expects the city's annual capex to peak at PLN260m in 2014 (22% of total spending), before declining as investments co-financed from the 2007-2013 EU budget taper off. Majority of this capex is being financed by capital revenue (including EU funding) and the current balance, limiting the city's debt financing needs. Fitch expects the city's debt-service and debt-coverage ratios to remain healthy in 2014-2016. Debt service, projected to average PLN40m (excluding early debt repayments), is likely to be covered by the operating balance by 1.5x-2x. The debt to current balance ratio is likely to be 11 years, below the city's debt maturity of 12-13 years. In January 2014 Kielce repaid PLN28m of high interest-bearing loans maturing in 2015-2017. Fitch views this as a positive rating factor, as these operations allow the city to reduce the cost of debt, and smooth the debt repayment profile, reducing refinancing risk in the medium term. The city's indirect risk, which arises mainly from PSEs' debt, is expected by Fitch to increase to PLN140m by end-2016 from a low PLN57m in 2013. However, their risk to Kielce's budget is alleviated, as these companies have the capacity to repay their debt from rents paid by housing tenants or tariffs paid by end-users. The local tax base is well diversified, but is weaker than the majority of other Polish cities that are capitals of regions. GDP per capita in 2011 (latest available data) for the Kielecki sub-region, which includes Kielce and surrounding towns and villages, was 80.4% of the national average. However, Fitch assesses Kielce's wealth indicators to be around the national average, as it is the strongest city in the sub-region. RATING SENSITIVITIES An upgrade may result from the city stabilising its operating performance in line with 2013 results, and achieving a debt to current balance ratio at below 10 years. A downgrade could result from a significant rise in debt or a sustained deterioration in operating performance with the operating margin below 5%, leading to debt service continuously exceeding the operating balance. Contact: Primary Analyst Maurycy Michalski Associate Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 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 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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