May 16, 2014 / 4:00 PM / 4 years ago

Fitch Affirms Metropolitan Municipality of Istanbul at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/BARCELONA/LONDON, May 16 (Fitch) Fitch Ratings has affirmed the Metropolitan Municipality of Istanbul's (Istanbul) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-', and its Short-term foreign currency IDR at 'F3'. The National Rating has been affirmed at 'AA+(tur)'. The Outlook is Stable. KEY RATING DRIVERS The ratings reflect Istanbul's continued strong operating performance, wealthy economy and solid fiscal management. They also take into account an expected increase in debt, contrary to Fitch's previous forecast of a decline, reflecting large capex investments in 2014-2016, which the agency expects will be funded through higher-risk foreign currency loans, rather than by local currency loans. Nevertheless Fitch expects operating performance to remain strong, albeit with a slight deterioration in debt coverage which should remain below two years. The Stable Outlook reflects Fitch's expectations that the city's operating performance and debt metrics should remain consistent with the current ratings. Fitch expects Istanbul to continue posting strong operating surpluses, supported by its large and well-diversified tax base and largely investment-focused responsibilities. The local economy was resilient against the adverse effects resulting from the investor sentiment change in the international capital markets and heightened political uncertainty in 2013, which led to a depreciation of the Turkish lira by about 26% against the euro and 20% against the US dollar. The city's tax revenue in 2013 grew 16.3% (yoy), resulting in an operating margin of 60%. Istanbul is Turkey's main economic hub, contributing about one fourth of national GDP and more than 40% of national tax receipts. Rapid urbanisation and continued immigration flows challenge the province with a continued need for infrastructure investments. In 2013 the population grew 2.2% yoy to 14.2 million. Istanbul plans to construct additional metro-bus lines of 200km in 2014-2019, which would cost around TRY25bn. Direct debt stood at TRY5.2bn at end-2013, up 14% (yoy) mainly due to the sharp depreciation of the Turkish lira, and is equal to 69% of its current revenue (see 'Turkish Subnationals: FX Volatility Manageable at Current Levels' on Istanbul faces significant foreign exchange risk in times of elevated financial volatility because a large part of its debt is denominated in foreign currency. At end-2013 foreign currency debt as a share of total debt stock increased to 93%, from 89% in 2012. Istanbul decided to increase its FX borrowing given a significant increase in domestic interest rates and the short term maturity profile of domestic loans. Additionally, Istanbul's dependence on imported rolling stocks for its investments in transportation infrastructure further exposes the city to foreign currency-denominated earmarked funding. The large foreign exchange risk is, however, mitigated by the city's lengthy maturity profile averaging 8.4 years. The risk of an uncontrolled rise in foreign currency borrowing is also checked by regulatory oversight as all foreign currency borrowings must be approved by both the National Interior Ministry and the central government's treasury. Should debt servicing costs increase materially as a result of currency depreciation, Fitch would expect Istanbul to respond by reducing its capital expenditure so that the debt to current balance ratio remains at 1.2-1.3 years in 2014-2016. The debt of IETT, Istanbul's metro operator and also part financier of the construction of the metro, declined 47% to TRY617m and matures towards the end of 2019. Fitch considers this as indirect debt. Istanbul's contingent liabilities are limited and its subsidiary companies are largely self-funding. RATING SENSITIVITIES A sovereign downgrade of Turkey (BBB-/F3) would prompt a downgrade of Istanbul's ratings. Persistent financial instability resulting in a further depreciation of the Turkish lira in excess of 30% , material interest rate volatility or a deterioration of the deficit before financing to more than 10% of total revenues could also prompt a downgrade, although this is not Fitch's base case scenario. An upgrade of the sovereign ratings may result in a similar action on Istanbul's ratings. Further, a reduction of foreign currency exposure to below 35% of its outstanding debt, continued financial strength and consistent management policies would be positive for the Long-term IDRs and National Ratings. KEY ASSUMPTIONS Our base case scenario relies on the following assumptions: -Operating margin to remain above 50% -Current balance sufficient to cover at least 60% of capital expenditure -Direct debt to current balance increases to 1.3 years in 2016 Contact: Primary Analyst Nilay Akyildiz Director +49 76 80 76 134 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Fernando Mayorga Managing Director +34 93 323 8407 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 23 April 2014 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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