Fitch Revises City of Czestochowa's Outlook to Positive; Affirms at 'BBB'
KEY RATING DRIVERS
The revision of the Outlook reflects the following key rating drivers and their relative weights:
Fitch expects Czestochowa will maintain a stable operating performance in 2015-2017 with an operating balance above 8% of operating revenue, sufficient to meet the city's debt service obligations by 1.8x-2.0x and support a debt-to-current balance of six to seven years. This scenario is based on our assumption that the city authorities' will continue to ensure that operating expenditure does not grow faster than operating revenue. Additionally, national economic growth should support the local economy's development and positively impact the city's tax revenue.
Fitch considers management practices as a supportive rating factor, which we expect to continue as the city's management has remained stable after the last local elections. This includes the city authorities' proactive approach focused on creating good conditions for business development in the city and attracting new investors, and also on spending rationalisation and cost control.
Czestochowa has a moderate debt burden compared with its peers. Fitch forecasts the city's debt will grow modestly in 2015-2017, on the back of investments, and remain moderate at below 50% of current revenue (expected in 2015: PLN454m or 45%). Fitch views positively the city's debt management. The majority of Czestochowa's debt was drawn from the European Investment Bank, at low interest rates, with long debt maturity and a smooth debt repayment profile, which reduces pressure on its budget.
Czestochowa's local tax base is well diversified, but is weaker than cities that are the capitals of the regions in Poland. GDP per capita for the Czestochowski sub-region, which includes Czestochowa and surrounding towns and villages, is lower than the national average (84%) but this may underestimate Czestochowa's performance as the city is the strongest area in the sub-region, but no precise data for the city itself in terms of GDP. The location of two special economic zones within the city is viewed as a supportive factor for the development of the local economy. These zones are of interest to investors, and once their business is placed there, this will support an increase in the local tax base.
Fitch expects city's capex at PLN900m in total over the three next three years. Most investments will be conducted with large co-financing from the EU 2014-2020 budget, which is expected to start to flow in 2H16. The city may apply up to 85% of co-financing. Czestochowa has already prepared technical documentation for its future investments, which makes it well positioned once the process of applying for EU funds starts. Fitch expects that more than 50% of capex financing will come from capital revenue, mainly EU grants, and the current balance, limiting debt growth pressure.
The city's ratings also reflect the following key rating drivers:
Fitch expects the city's indirect risk to remain low in the medium term. Contingent liabilities include the long-term debt of its companies and health care units, partly guaranteed by the city. The majority of indirect risk stems from the city's hospital, which may require financial assistance from the city budget through guarantees, or loans or loss coverage in the medium term. However, the size of this support should be limited relative to the city's budget, at below 1% of operating revenue.
Maintenance of moderate debt and a sound operating balance resulting in debt payback improvement to six years would lead to an upgrade.
Fitch assumes that operating expenditure does not grow faster than operating revenue leading to deterioration of the operating margin.
Fitch assumes the investment programme will not be significantly extended leading to an increase in new debt.
Fitch also assumes that the city will comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU.