OREANDA-NEWS. Fitch Ratings has upgraded Poland-based Zaklad Komunikacji Miejskiej w Gdansku Sp. z o.o.'s (ZKM) Long-term local currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-' and its National Long-term rating to 'A+(pol)' from 'A(pol)'. The Outlooks are Stable.

Fitch has also upgraded ZKM's PLN220m tram and PLN60m bus revenue bond programmes and their bonds' Long-term local currency ratings to 'BBB+' from 'BBB' and National Long-term ratings to 'AA-(pol)' from 'A+(pol)'.

KEY RATING DRIVERS
The rating action follows the recent upgrade of the Long-term foreign and local currency IDRs of the Polish City of Gdansk, ZKM's sole owner (see 'Fitch Upgrades Polish City of Gdansk to 'A-'; Outlook Stable' dated 27 March 2015 at www.fitchratings.com).

In Fitch's view, ZKM's and its revenue bond programmes' links with the city remain strong. Based on the top-down approach under our public-sector entities rating criteria, the ratings of the revenue bond programmes and ZKM are one and two notches lower than the ratings of the City of Gdansk, respectively.

The one-notch differential between the revenue bond programmes and the City of Gdansk's ratings reflects the lack of an explicit guarantee for the bond programmes issued by the city. However, a support agreement links their ratings to those of the city.

ZKM's ratings are two notches lower than the city to reflect the lower legal protection of non-bondholders compared with revenue bondholders. The bondholders have a first claim on revenues in the tram and bus venture accounts (VA) for an amount equal to the next 12 months of bond service obligations. This provides preferential treatment as far as the timeliness of repayment is concerned. In addition, the bondholders have a pledge on venture assets, excluding them from the bankruptcy estate, which in case of liquidation subordinates non-bondholders.

The multi-year contract for bus and tram transport services between the city and ZKM provides the company with over 90% of its total revenue. The contract complies with EU resolution 1370/2007 and the remuneration for transport service paid by the city covers all ZKM's costs and ensures a reasonable profit for the company. Fitch does not expect any negative changes to the company's business model and to the financing of ZKM under the contract, and assumes stable and predictable inflows for ZKM in the long term.

Annual inflows to the VA significantly exceed annual obligations to revenue bond holders and Fitch expects the VA's liquidity to remain high. Cash paid into the tram VA was PLN118.6m in 2014, while obligations to its bond were PLN19.4m. For buses, these figures were PLN134.2m and PLN12.1m, respectively.

RATING SENSITIVITIES
ZKM's ratings could be downgraded if the links between ZKM and the City of Gdansk weaken. A downgrade of Gdansk's ratings could also impact ZKM. The revenue bonds may be downgraded if their status in the capital structure weakens or if the VA's liquidity deteriorates.

An upgrade of ZKM and its revenue bonds may result from an upgrade of the City of Gdansk's ratings, assuming ZKM's and its revenue bond programmes' links with the city remain as strong or from an explicit guarantee by the sponsor.