Fitch Affirms Polish City of Torun at 'BBB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Polish City of Torun's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' and National Long-Term rating at 'A(pol)'. The Outlooks are Stable.
The affirmation reflects the city's satisfactory budgetary performance, which is in line with Fitch's base case scenario, and our expectations that the city will maintain its sound operating results in the medium term.
KEY RATING DRIVERS
The ratings reflect Fitch's expectation that the city will continue to post healthy operating results in 2016-2018 with a sound operating margin of 12%-13% and an average debt payback ratio of 10-11 years. The ratings also factor in Torun's medium-sized economy and budget, and fairly high direct and indirect risk following large investments.
The ratings are supported by the city administration's prudent financial and strategic management, particularly in long-term financial projections and close monitoring of both market conditions and budgetary execution. We also view positively the city's debt policy of contracting long-term, low-cost funding from international financial institutions, securing smooth debt repayments and of maintaining the current balance at levels that are sufficient to meet annual debt obligations.
The city's overall budgetary performance in 2015 was in line with our base case scenario, with an operating margin of 12.6%. During the year the city repaid a PLN161m EIB loan, using surplus EU funds received for one of its already completed investment. The early repayment inflated the city's debt service ratio to 230% from 75% in 2015, as EU funds are defined as capital revenue and not included in the operating balance calculation of the ratio.
Fitch expects Torun will post close to balanced results over the medium term, following the completion of most of its costly investments and given that the next large investment is not expected to start until 2018. As in the past, the city will apply for funds available for Polish local governments under the 2014-2020 EU budget to co-finance its capex, which will help limit the city's demand for new debt.
Torun's ambitious investments in the past have resulted in fairly high indebtedness. At end-2015 the city's net overall risk (direct and indirect debt) was high at 141% of current revenue. Torun authorities shifted some large-scale infrastructure improvement works to the city's municipal companies, which they financed with debt and EU grants. We expect that public sector entities' debt will gradually decline in line with their debt redemption schedule. Torun provides capital support to its public sector entities (PLN40m annually), which is included in the city's multiyear financial plan.
Torun is a medium-sized Polish city with around 202.000 inhabitants. GRP per capita in the Bydgosko-Torunski sub-region, where the city is located, was 103.9% of the national average in 2013. The city's economy is diversified, with services playing an important role. Torun is a cultural and higher education centre with about 40,000 students, ensuring a highly qualified labour force. It is an attractive tourist destination and receives about 1.5 million visitors every year, as its old town is a UNESCO World Heritage site.
Fitch expects Poland's real GDP to grow 3.5% annually in 2016-2017, which should continue to support Torun's economic development.
The ratings could be upgraded if Torun reduces its direct and indirect debt below 100% of current revenue, while maintaining sound operating performance as reflected in a debt payback ratio of below 10 years.
The ratings could be downgraded if the overall debt burden (direct and indirect risk) exceeds 150% of current revenue or if its operating balance becomes insufficient to cover debt service (principal and interest) on a sustained basis.
Fitch assumes the city investment programme will not be significantly extended, leading to an increase in new debt requirements.
Fitch also assumes that the city will comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU.
Fitch assumes that any new delegated tasks from the central government will be neutral to the city's operating performance.
Fitch based its projections on the currently binding legal framework for Polish local governments, especially revenue and expenditure allocation.