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

Fitch Rates Polish Municipality of Ostrow Wielkopolski 'BBB+'; Stable Outlook

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Municipality of Ostrow Wielkopolski - Rating Action Report here WARSAW/LONDON, December 22 (Fitch) Fitch Ratings has assigned the Polish Municipality of Ostrow Wielkopolski a Long-Term Local-Currency Issuer Default Rating (IDR) of 'BBB+'. Fitch has upgraded National Long-Term Rating to 'AA(pol)' from 'A+(pol)'. The Outlook is Stable. The IDR of Ostrow reflects its sound operating performance, which we expect to be maintained over the medium term, as well as its low debt and strong debt coverage ratios. The upgrade of National Long-Term Rating reflects Fitch's reassessment of credit strength of Ostrow relative to its national peers. KEY RATING DRIVERS The ratings reflect the following key rating drivers and their relative weights: HIGH Fiscal Performance (Neutral) Fitch expects that over the medium term Ostrow will continue to report strong operating performance, with an operating margin of around 13% annually and an operating balance estimated on average at PLN30 million or 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. Debt, other Long-term Liabilities (Strength) Fitch expects direct debt to decline to PLN45 million or below 20% of current revenue in 2020 from around PLN70 million expected in 2017. We project a debt payback ratio of around two years over the medium term (2017 preliminary: 2.2 years), which is the lowest among Ostrow's peers. Fitch expects capex to average around PLN35 million annually over the medium term or around 12% of total expenditure. Ostrow will apply for EU funds to co-finance capex. The city invests mainly in local infrastructure such as roads, schools, kindergartens or municipal buildings. Capex financing will largely come from the city's own resources and capital revenue, and partially from new debt. The debt of Ostrow's municipal companies totalled PLN54 million in 2016. The majority of the public sector entities' (PSEs) debt was related to two companies that invested in projects co-financed by EU. In Fitch's view, indirect risk does not constitute a major risk to the city's budget as these companies are repay their debt with their own revenue. Ostrow has issued only one guarantee amounting to PLN1.7 million, which relates to the debt of the municipal housing association; however, it does not pose a risk to the city's budget as the company has been servicing its debt on time. MEDIUM Management & Administration (Neutral) As a municipality Ostrow has different responsibilities, a 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 maintains a cash buffer for unexpected expenses. It also creates an environment conducive to business and a comfortable standard of living to deter migration from the city. As with many other Polish subnationals, Ostrow also faces pressure on operating expenditure, especially on education due to the state reform implemented in 2017 and rising salaries. In response the city's administration has implemented a range of cost-rationalisation measures such as organising collective tenders for utilities and modernising public buildings. We assume that the city will continue with this approach in the medium term. Institutional Framework (Neutral) 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. The city's ratings also reflect the following key rating drivers: Economy (Neutral) Ostrow is a small city, with around 70,000 inhabitants, but is located close to the capitals of three Polish regions. This makes the city an attractive place to live in. Unemployment in the city in October 2017 (3.2%) was below the national average (6.6%). 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 9% below the national average in 2015 (latest available data). RATING SENSITIVITIES Ostrow's ratings could be upgraded if the city strengthens its financial flexibility while maintaining sound debt metrics and its debt payback ratio at below five years. A downgrade could result from a weakening of the city's operating performance accompanied by significant increase in debt, resulting in deterioration of the debt payback ratio towards 10 years on a sustained basis. 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 Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Additional information is available on 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 Dodd-Frank Rating Information Disclosure Form here Solicitation Status here 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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