December 22, 2017 / 9:07 PM / in a year

Fitch Rates Polish City of Rybnik 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: City of Rybnik - Rating Action Report here WARSAW/LONDON, December 22 (Fitch) Fitch Ratings has assigned the Polish City of Rybnik a Long-Term Local-Currency Issuer Default Rating (IDR) of 'BBB+'. The Outlook is Stable. At the same time Fitch has affirmed Rybnik's National Long-Term Rating at 'AA+(pol)' with Stable Outlook. The action reflects our unchanged view of the city's sound operating performance and the low direct debt. Although the latter is expected to rise, it will not negatively affect the city's debt service and debt payback ratios. The ratings also take into account the potential refund of property tax to a coal mine, which will be absorbed by the city's strong liquidity. KEY RATING DRIVERS The ratings reflect the following key rating drivers and their relative weights: HIGH Debt, Liabilities and Liquidity - Strength: Rybnik has repaid nearly all its existing debt in 2017. At end-November, with the full redemption of bonds, debt has fallen to a low PLN5 million from PLN21.3 million at end-2016. However, in December, the city drew the first tranche of PLN80 million under its loan agreement with European Investment Bank (EIB) and we expect direct debt to reach PLN85 million or close to a still low 12% of current revenue at end-2017. We also expect the debt payback ratio to remain at a low 1.2 years (2016: 0.3 years). To finance planned investments for 2017-2020 totalling PLN740 million (on average 21% of total expenditure annually), Rybnik has secured financing with an EIB loan of up to PLN267 million. We expect Rybnik's debt to peak at PLN190 million by end-2020 but remain below a moderate 30% of current revenue. Its debt payback ratio should remain strong and be no more than four years over the medium term. Main investment is the construction of the regional expressway with a ring-road in Rybnik (costing about PLN460 million). Fiscal Performance - Neutral: We project Rybnik to maintain an operating margin of about 10% in 2017-2019, driven by expected growth of the national economy averaging 3.7% annually, which should translate into higher tax revenue (personal income and property tax). Rybnik's interim results for 3Q17 are in line with our projections. The city reported an operating margin of 13.4% and an operating balance of PLN75 million or 4x its annual debt service in 2017. As operating expenditure usually accelerates during 4Q17, we expect that the city's operating balance will ease to PLN65 million at end-2017. In 2020, Rybnik's operating margin could fall to about 8%, due to a possible tax refund to a coal mine, pending a court verdict by 2019. The court ruling, the final amount and the possible repayment schedule are unknown at present, but we assume that the city's sound liquidity and strong operating performance would be able to absorb the refund, leaving the city's debt service capacity intact. MEDIUM Management and Administration - Strength: Rybnik's approach to budgeting is cautious, given inflexible current revenue and expenditure. Its operating margin is supported by our expectations of continued restraint on operating expenditure. The city's investment programme is considered and planned according to the city's self-finance capacity. Debt is incurred solely for financing investment and long-term loans with smooth amortisation are preferred, easing pressure on debt servicing. Institutional Framework - Neutral: Fitch assesses the regulatory regime for Polish local and regional governments (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. Prudent individual borrowing limits are in place, which should help protect LRGs against taking on excessive debt. The city's ratings also reflect the following key rating drivers: Economy - Neutral: Rybnik is a medium-sized city with a population of about 140,000 located in the Slaskie Region and close to the Czech border. Its unemployment rate at end-October 2017 was 4.5% compared with 6.6% in Poland. Data for gross regional product for Rybnik is not available. Gross regional product per capita in 2015 (latest available data) in the Rybnicki sub-region was 87.7% of the national average; however, the ratio does not fully reflect the city's metrics as the sub-region includes also surrounding towns and villages that usually have weaker wealthy indicators. RATING SENSITIVITIES Rybnik's ratings could be upgraded if the city strengthens its operating performance, while maintaining sound debt metrics and a debt payback ratio at below five years on a sustained basis. A downgrade could result from a weakening of the city's operating performance accompanied by significant increase of debt, resulting in deterioration of the debt payback ratio towards 10 years on a sustained basis. Contact: Primary Analyst Dorota Dziedzic Director +48 22 338 62 96 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: malgorzata.socharska@fitchratings.com. 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