October 20, 2017 / 8:21 PM / a year ago

Fitch Affirms Polish City of Gliwice at 'A-'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/LONDON/MOSCOW, October 20 (Fitch) Fitch Ratings has affirmed the Polish City of Gliwice's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A-' and National Long-Term Rating at 'AA+(pol)'. The Outlooks are Stable. The affirmation reflects Fitch's unchanged view that Gliwice will maintain its sound operating performance and strong debt ratios, despite pressure on operating spending. KEY RATING DRIVERS The 'A-' IDRs factor in Fitch's expectations that Gliwice will continue to demonstrate solid operating performance in 2017-2019, with an operating balance of around PLN150 million (14% of operating revenue), which would be above the city's average for 2011-2016 (PLN120 million). This will be underpinned by the city authorities' continued cost control measures and tax revenue increase, supported by projected growth of the national economy. In 1H17 Gliwice continued to report strong operating results, with an operating balance of PLN109 million (end-1H16: PLN91 million) accounting for more than 20% of operating revenue. This was supported by the city's growing tax revenue (up 6.5% year-on-year driven mainly by real estate and personal income taxes) following economic expansion, as well as the expiration of tax reliefs granted to companies located in the special economic zone. Strong operating results, more asset sales and slower capex launch resulted in an intra-year budgetary surplus of PLN47 million. Fitch expects the city's operating expenditure to accelerate during 2H17 in light of persistent pressure on operating spending, especially on education following the state-initiated educational reform, and on salaries. Fitch also expects a moderate acceleration of capex especially in 4Q17, although some of the scheduled 2017 capex may still slip into 2018. Consequently, in 2017 Fitch expects Gliwice's budget to be close to balance, before turning into a deficit of 3%-5% of total revenue in 2018-2019 following the roll-out of new investments, which are co-financed from the 2014-2020 EU budget. Fitch projects that Gliwice's investment spending in 2017-2019 could total PLN1 billion (on average 26% of annual total expenditure). This will be below the 2011-2016 average of 34%, when the city was implementing a large regional motorway co-financed by state and EU investment grants. Similar to previous years, Fitch expects the city to finance the majority of its capex (about 80%) from the current balance, proceeds from asset sales and non-returnable investment grants available to Polish local and regional governments (LRGs), which will limit Gliwice's recourse to debt. Fitch's rating case scenario expects the city's direct debt to be around 30%-35% of current revenue in 2018-2019, up from 26% or PLN269 million expected at end-2017 (end-2016: PLN285 million). Fitch projects the city's debt service and debt payback ratios will remain strong in 2018-2019, despite debt growth. Debt servicing will be around 15%-20% of the operating balance and debt-to-current balance at about two to three years (2017: expected 1.8 years), well below the city's final debt maturity of up to 18 years. Gliwice's debt structure does not create pressure on the city's budget, as almost all of the debt outstanding at end-3Q17 was drawn from the European Investment Bank, and carried low interest rates and long maturities. This benefits the budget as it limits the city's annual debt-service burden. Additionally, the city is not exposed to foreign-currency or interest rate risk, as at end-3Q17 all of Gliwice's debt was denominated in Polish zloty and almost all of it was fixed-rate. During 1H17 cash in the city's accounts exceeded debt servicing by almost 4x. The city has a long track record of cash balances at year-end exceeding the scheduled annual debt service for the following year, which is positive for the ratings. Fitch expects the city's liquidity to be partly absorbed by investments in 2017-2019, but it should remain sound. The city's authorities follow a prudent budgetary and financial policy, which guarantees solid operating performance despite persistently high pressure on operating expenditure. Much of the operating expenditure pressure arises from under-funded responsibilities that were transferred to local governments by the state in the past and from the dominance of rigid spending items, such as education and social care. Pressure on the budget also comes from growing maintenance costs as investments are being completed. Fitch expects the city's tax revenue to continue to grow in 2017-2019, supported by average forecast GDP growth of 3.5% per year. With a population of 182,156 at end-2016 (Central Statistical Office data), Gliwice is a medium-sized city by Polish standards, located in the Slaskie region and part of the Upper Silesian Agglomeration (2 million inhabitants). The city's economy is well-developed and attractive to investors, as it benefits from the city's location at the crossroads of the main Polish rail and road corridors, and from a well-educated and highly qualified labour force. GDP per capita in 2015 (last available data) for the Gliwicki sub-region, which includes Gliwice and surrounding cities and villages, was 120% of the national average. Fitch assesses the regulatory regime for Polish LRGs as neutral. LRGs' activities and financial statements are closely monitored and reviewed by the central administration. LRGs' finances are public and LRGs are obliged to disclose their financial accounts on time and in detail. 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. RATING SENSITIVITIES Gliwice's IDRs are currently equalised with those of the Polish sovereign (A-/Stable). They could be upgraded if Gliwice maintains a sound operating performance leading to the debt payback ratio falling below two years on a sustained basis, provided the sovereign is also upgraded. Negative action on Poland's ratings will be reflected on Gliwice's ratings. Negative rating action could also result from a sustained deterioration of the operating performance or a significant rise in the Gliwice's direct debt, leading to the city's debt payback ratio exceeding eight years. Contact: Primary Analyst Maurycy Michalski Director +48 22 330 67 01 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 9901 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. 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