Fitch Affirms Polish City of Gliwice at 'BBB '; Outlook Positive
The affirmation reflects Fitch's unchanged baseline scenario regarding the city's sound operating performance and moderate debt levels.
KEY RATING DRIVERS
The 'BBB+' IDR and Positive Outlook reflects our expectations that Gliwice will maintain a strong operating performance in the medium term, and that despite high capital spending debt-to-current revenue will remain moderate below 50%. The ratings also factor in Gliwice's prudent financial management, which together with a high share of earmarked capital grants and healthy liquidity, supports the implementation of the city's current investment plan.
Fitch's base case scenario expects Gliwice's operating performance to remain stable in 2015-2017 with an operating margin around 14%. This will be supported by the city authorities' effective policy to limit opex growth, coupled with increasing revenue from income and property taxes, supported by expansion of the city's tax base.
Fitch projects that Gliwice's investment spending in 2015-2017 could total PLN1.1bn (on average 30% of annual total expenditure), mainly due to the finalisation of a regional motorway co-financed by the state and the EU. About 80% of investment financing is likely to come from the city's current balance and capital grants (mainly from the EU budget), which limits the city's debt financing needs in the medium term.
Fitch base case scenario expects the city's debt after investment to peak at about 50% of current revenue in 2016-2017, up from 34% or PLN290m expected at end-2015. However, this increase should not put much pressure on Gliwice's budget, due to the city's continued solid budgetary performance and the dominance of low-cost and long-term financing from the European Investment Bank.
Fitch projects that despite debt growth, the city's debt service and debt payback ratios will remain strong in 2015-2017. Debt servicing will be around 13% of the operating balance and the debt-to-current balance, albeit deteriorating to about three to four years from 2.4 years expected in 2015, will still remain well below the city's final debt maturity (up to 19 years).
The city's authorities follow a prudent budgetary and financial policy, which guarantees solid operating performance despite persistently high pressure on operating expenditure. Much of the operating expenditure pressure arises from under-funded responsibilities that were transferred to local governments by the state in the past and from the dominance of rigid spending items such as education and social care. Additionally, pressure on the budget comes from growing maintenance costs as investments are being completed.
An upgrade may result from diminishing recourse to debt to finance capital expenditure leading to direct debt stabilising at below 50% of current revenue, and from operating balance at around 14% of operating revenue on a sustainable basis.
Fitch expects the city to maintain its control of operating expenditure growth and to prudently manage its budget over the medium term.
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, Gliwice could face the penalty of having to return previously received EU grants.