OREANDA-NEWS. Fitch Ratings has affirmed the Polish City of Czestochowa's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB'. The Outlooks are Positive.

The affirmation and Positive Outlook reflect the city's continued good operating performance, in line with Fitch's projections.

KEY RATING DRIVERS
The ratings reflect a moderate debt burden and a favourable debt structure as well as strong liquidity and good management practices. The ratings also take into account indirect risk resulting from the city's hospital, which may require support from the city's budget in the medium term.

Fitch expects Czestochowa to continue demonstrating good operating performance in 2016-2018. In our base case scenario, we estimate an operating balance above PLN80m per year or above 8% of operating revenue (2015: PLN86m and 8.5%), which would comfortably cover projected debt servicing 1.6x (debt repayment and interest) and allow the city to maintain debt-to-current balance at six to seven years.

This scenario is based on our assumption that the city authorities' will continue to ensure spending rationalisation and cost control, keeping the growth of operating expenditure below or in line with the operating revenue growth. Additionally, the developing tax base following the continued national economic growth and private investments in the city should support operating revenue growth.

In 2016 Fitch expects the city to post almost a balanced budget for the second consecutive year, before turning small deficits from 2017 (of about 3% of total revenue) following investments. This will result in direct risk stabilisation in 2016 at the 2015 actual level and then modest debt growth in 2017-2018, but it will remain moderate at below 50% of current revenue. The city's capex may rise to about PLN300m annually in 2017-2019 (from less than PLN150m expected in 2016), once the EU co-financed investments fully roll-out with EU grants covering more than 50% of the outlays.

Czestochowa has a moderate debt burden and lower appetite for new debt compared with its peers. The city's debt was PLN452m at end-2015 and accounted for 44.5% of current revenue (down from 51% in 2012). The city's debt to current balance was 5.9 years, which was well below the city's final debt maturity (up to 15 years). Over 90% of Czestochowa's debt was drawn from the European Investment Bank and the city intends to also use EIB loans in the medium term. These loans with low interest rates, long debt maturity and a smooth debt repayment profile, reduce pressure on the city's budget. The city's liquidity is sound, with the average cash in the city's accounts of about PLN60m in 2015.

Fitch estimates the city's contingent liabilities at about PLN100m at end-2015, in about 60% relating to debt of self-supported municipal companies and not putting pressure on the city's budget. However, Fitch notes that the city's hospital (PLN40m of debt at end-2015) may require further financial assistance from the city budget through guarantees, or loans or loss coverage in the medium term. The size of this support should be limited relative to the city's budget, at below 1% of operating revenue.

Fitch considers management practices a supportive rating factor, which we expect to continue. This includes the city authorities' proactive approach focused on creating good conditions for business development in the city and attracting new investors. The city's prudent budgetary and financial policy guarantees a good operating performance despite persistent pressure on operating expenditure.

Czestochowa's local tax base is well diversified, but is weaker than cities that are the capitals of the sub-regions in Poland. GDP per capita in 2013 (latest available data) for the Czestochowski sub-region, which includes Czestochowa and surrounding villages, was 84.5% of the national average. We estimate the city's wealth indicators are on a par with the national average, as Czestochowa is the strongest area in the sub-region. The location of two special economic zones within the city, being of interest to investors, is viewed as a supportive factor for the development of the local economy.

RATING SENSITIVITIES
An upgrade may result from maintenance of moderate debt and a sound operating balance translating into debt payback at about six years on a sustainable basis.

KEY ASSUMPTIONS
Fitch assumes that the city will continue to receive EU funds to co-finance its investment programme. Fitch also assumes that the city will continue to comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU. Otherwise, the city could face the penalty of having to return previously received EU grants.

Fitch expects the city to continue its efficient control over operating expenditure growth and to manage the budget prudently in the medium term.

Fitch based its projections on the currently binding legal framework for Polish local governments, especially revenue and expenditure allocation. In addition, Fitch assumes that any new delegated tasks from the central government will be neutral to the city's operating budget.