May 23, 2014 / 4:45 PM / in 4 years

Fitch Affirms Estonia's City of Tallinn at 'A'/Stable

(The following statement was released by the rating agency) WARSAW/LONDON/MOSCOW, May 23 (Fitch) Fitch Ratings has affirmed Estonian City of Tallinn's Long-term foreign and local currency ratings (IDRs) at 'A' with Stable Outlook. Fitch has also affirmed Tallinn's Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS The ratings reflect the city's strong financial and debt management practices, projected moderate debt levels over the medium term and its low contingent liabilities. They also take into account the city's wealthy and diversified local economy, although it is vulnerable to the economic downturn in Europe due to its small size and its reliance on European export markets. The Stable Outlook reflects Fitch's expectations that the city will be able to maintain a stable operating margin of 7%-8% over the medium term. This will be supported by effective financial and cost management and by measures aimed at strengthening the city's revenue generation capacity. Tallinn's operating balance for 2013 amounted to EUR32m or 7.4% of operating revenue, exceeding Fitch's projections. The strong performance was driven by higher personal income tax revenue and operating cost savings. The introduction of free public transport in the city in 2013 affected its operating performance by a smaller extent than had been expected by Fitch. Fitch projects that Tallinn's capital outlays are likely to average EUR60m per year for 2014-2016, i.e. 12% of total spending. The city's self-funding capacity is high, with the current balance and capital revenue (including a high share of EU grants) covering most of capital expenditure. In 2013, capital expenditure amounted to a high EUR96m, of which EUR26m was financed with debt, in line with Fitch's projections. Fitch expects the city's direct risk to remain moderate in 2014-2016, at 55% of current revenue. The city has advanced debt management practices, aimed at limiting debt costs and securing a smooth debt repayment schedule through refinancing of existing obligations. The city's cash position is sound, with about EUR30m held in its accounts in 2013. Fitch expects Tallinn's operating balance to fully cover debt service for 2014-2016. The debt-to-current balance should improve to six years by 2016 (2013: 7 years), remaining below its average debt maturity of 11 years. In 2013, the operating balance was sufficient to cover debt service by 5x. Tallinn's indirect risk is low and is forecast to decrease to EUR55m at end-2016, from EUR63m in 2013. Its indirect risk is related to its municipal companies' debt-financed investments and counts towards the city's debt limits. Tallinn, being the economic centre of Estonia, contributes to at least 50% of the national GDP. The diversified and wealthy economy results in high tax revenue for the city. However, given the country's small size relative to Europe, the city's economy is vulnerable to economic contraction in Europe. Fitch expects Estonia's real GDP will grow by 3%-4% in 2014-2015, up from 0.8% in 2013 but down from 7.6% in 2011. RATING SENSITIVITIES The ratings could be downgraded if the city's operating performance deteriorates beyond Fitch's expectations, with its operating balance failing to cover interest paid by 2x on a sustained basis. The ratings could be upgraded if the city's operating balance structurally strengthens to about 10% of operating revenue, accompanied by stable direct and indirect risk over the medium term. Contacts: Primary Analyst Dorota Dziedzic Director +48 22 338 62 96 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Guido Bach Senior Director +49 69 768076 111 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 99 01 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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 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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