Fitch Affirms Polish City of Poznan at 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Polish City of Poznan's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A-'. The Outlook is Stable.
The rating affirmation reflects our unchanged view that the city's strong performance will be maintained over the medium term, providing adequate debt service.
The ratings reflect Poznan's sound operating performance, moderate direct debt, high self-funding capacity, a well-diversified local economy and a stable regulatory regime. The ratings also factor in the city's high contingent liabilities.
KEY RATING DRIVERS
We expect the city will maintain its sound operating performance and post operating margins of 13%-14% in 2015-2017. We assume that the new administration will actively seek investments for the city, to help expand the local tax base and provide higher tax revenues. Our projections include an increase in current spending by an additional 2%-2.5% of total operating expenditure in 2016. We assume that these are one-off cost adjustments and the city will continue with its policy of cost restraint.
We forecast Poznan's capital expenditure at PLN1.9bn in 2015-2017 or 19% of total expenditure on average, i.e. a similar level to 2010-2014. Major projects are likely to be focused on infrastructure (roads), the waste incinerator plant and public transport. The city's capacity to self-fund investments is high, with capital revenue (mainly EU grants) and the current balance covering most of its capital expenditure. This should reduce new financing needs.
We expect Poznan's direct debt to stabilise at about 60% of current revenue in 2015-2016 as a result of a high current balance and EU grants financing investments. This figure is forecast to decline to 55% of current revenue or to PLN1.59bn at end-2017, from PLN1.65bn (61% of current revenue) expected for end-2015. Poznan's debt is on a downward trend since 2011, when it represented 77% of current revenue.
For 2015-2016, we expect that Poznan's operating balance should comfortably cover projected debt service by at least 1.2x (including planned premature redemption) or 2.0x excluding it. The city's debt payback ratio (debt-to-current balance) should stabilise at five years in 2015-2017, similar to 2014 and below the average debt maturity of seven years.
The city is exposed to fairly high contingent liabilities stemming from public sector entities debt. We expect indirect risk (companies' debt and guarantees issued by the city) to peak at PLN1.4bn (52% of current revenue) at end-2015 and gradually decline to PLN1.1bn (38%) by end-2017. We consider this level of indirect risk to be manageable, as it should not put direct pressure on the city's budget due to the high self-financing ability of the companies.
Poznan's economy is well-diversified across sectors, supporting revenue growth and resulting in gross domestic product per capita being 2x the national average. Services dominate the local economy as they produce 73% of gross value added and employ 79% of the local workforce. At end-August 2015, Poznan's unemployment rate was the lowest among Polish cities (2.7%) and far below the national average (10%).
The ratings could be upgraded if the City of Poznan improves its operating margin to above 15% on a sustained basis accompanied by contained net overall risk growth and an upgrade of the sovereign rating (A-/Stable).
A downgrade could result from sustained deterioration of the operating margin below 10%, or a significant rise in direct debt leading to the city's debt payback ratio exceeding 10 years (2014: 4.9 years).
Fitch expects the city to continue exercising operating expenditure restraint and to manage the budget prudently over the medium term.
Fitch assumes that the city will continue to receive EU funds to co-finance its investment programme.