July 17, 2017 / 12:19 PM / 6 months ago

Fitch Affirms Municipality of Ostrow Wielkopolski at 'A+(pol)'

(The following statement was released by the rating agency) WARSAW/LONDON, July 17 (Fitch) Fitch Ratings has affirmed the Polish Municipality of Ostrow Wielkopolski's National Long-Term Rating at 'A+(pol)'. The Outlook is Stable. The affirmation reflects Ostrow's sound operating performance, which we expect to be maintained over the medium term. The ratings reflect also Ostrow's low debt and healthy debt ratios. The ratings further factor in the small size of the city and, as such, limited budget flexibility, which makes it vulnerable to negative changes in economic trends, although this is partially mitigated by prudent financial management. KEY RATING DRIVERS Fitch expects that over the medium term Ostrow will continue to report a healthy operating performance, with an operating margin of around 13% annually and an operating balance on average estimated at PLN30 million or 2.5x-3x annual debt service (instalments with interests). In 2016 Ostrow posted a sound operating margin of 13.5% and an operating balance of PLN33 million or 2.8x annual debt service. Fitch expects direct debt to remain low below 30% of current revenue and the debt payback ratio to be at around two years (2016: 2.2 years), which is the lowest among Ostrow's peers. Limited financing requirements and the city's self-financing capacity mean direct debt should remain stable in nominal terms at around PLN68 million over the medium term (2016: PLN67.6 million). Fitch expects capex to average around PLN37 million annually in the medium term (2016: PLN38 million). The main area of investments will be local infrastructure, including roads and transport, municipal housing and kindergartens. Ostrow will apply for EU funds to co-finance capex. As a municipality Ostrow has different responsibilities, smaller budget and consequently lower flexibility than larger cities rated by Fitch. The small size of the Ostrow's budget makes the city more exposed to adverse changes in the local economy or institutional framework. However, the city's administration takes a prudent approach to budgeting and maintaining a cash buffer for unexpected expenses. It also creates an environment conducive to business and comfortable living conditions to prevent migration of people from the city. The debt of Ostrow's municipal companies totalled PLN54 million in 2016 (2015: PLN58 million). The majority of the public sector entities' (PSEs) debt was from RZZO, which constructed a solid waste treatment plant, a project largely financed from EU grants; and from OTBS, which is responsible for the construction of municipal buildings. In Fitch's view, indirect risk does not constitute a major risk for the city's budget as these companies are self-supporting and repay their debt from their own revenue. Ostrow is a small city, with around 70 thousand inhabitants, but is located close to the capitals of three Polish regions. This makes the city an attractive place to live. Unemployment in the city in 2016 (4.7%) was below the national average (8.3%). However, Ostrow's wealth indicators are weaker than the national average. Gross regional product per capita in the Kaliski subregion, where Ostrow is located, was 13% below the national average in 2014 (last available data). The regulatory regime for Polish local governments (LGs) is reasonably stable. Their activities and financial statements are closely monitored and reviewed by the central administration. Disclosure of the LGs' accounts is satisfactory. The main revenue sources, such as income tax revenue, transfers and subsidies from the central government are centrally distributed according to a legally defined formula, which limits the central government's scope for discretion. However, local tax rates such as real estate tax, which some LGs are entitled to collect, are capped by the state. This makes LGs somewhat reliant on decisions made by the central government and limits their revenue-raising flexibility. RATING SENSITIVITIES The rating could be upgraded if operating performance further improves as reflected by the operating margin increasing to 17%-18%, and net overall risk falling below 35% of current revenue on a sustained basis. The rating could be downgraded if operating performance deteriorates, coupled with direct debt rising materially above 35% of current revenue and a debt payback ratio above 10 years. Contact: Primary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Renata Dobrzynska Director +48 22 338 62 82 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 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 International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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