OREANDA-NEWS. This announcement corrects the version published on 4 December, which incorrectly stated the weights of the key rating drivers.

Fitch Ratings has upgraded the Metropolitan Municipality of Bursa's Long-term foreign currency and local currency Issuer Default Ratings (IDR) to 'BB+' from 'BB' and National Long-term Rating to 'AA(tur)' from 'AA-(tur)'. The Outlooks are Stable.

The upgrade reflects Bursa's expected increase in shared tax revenue income, which has been boosted by the Law 6360 that came into force in March 2014. As of end-2014, operating revenue had already increased by35% yoy on a nominal basis with an annual inflation rate of 8.5%. The expected strong operating performance and wealthy economy together with high capital revenue, supports a high self-financing capacity for its ongoing large capex investments envisaged for 2016-2018. The upgrade also takes into account that direct debt should remain at 100% of the current revenue, despite the FX risk the city is exposed to and its large capex investments.

KEY RATING DRIVERS
The upgrade reflects the following key rating drivers and their relative weights:

HIGH
Fitch expects operating revenue to grow at 14% CAGR in 2016-2018, and estimates operating spending will grow at 12% CAGR during the same period, supporting operating margins above 40%.

In 3Q15, Bursa posted a strong operating margin of 43.5%, which was supported by operating expenditure growth substantially below operating revenue and also reflects its investment driven responsibilities. The local economy was resilient to the adverse sentiment change in the international capital markets in 2014 and 2015. The city's tax revenue in 2014 grew by 18% yoy on a nominal basis and is expected to increase by 20% as of end 2015.

The city's authorities follow a solid budgetary policy and improving financial planning, which guarantees solid operating performance, although adjustments in improved liquidity planning could be undertaken. Sound financial planning enables further large financing needs of capex investments to be covered in a timely and forward looking manner.

Bursa is Turkey's fourth-largest contributor to its GVA, contributing on average 6% in 2004-2011 (last available statistics). The metropolitan city accounts for 3.6% of the Turkish population, or 2.8 million people in 2014. The city is the main hub for the country's automobile and automotive industry, followed by steel production, textile and food-processing industries

MEDIUM
Fitch projects the improved operating balance will help reduce Bursa's overall risk on a sustainable basis. Further, Fitch expects the city to remain committed to reducing its unhedged FX exposure, and continue its expenditure discipline.

This would help Bursa to reduce its direct debt on a sustainable basis to 100% of its current revenue, with the debt to current revenue ratio decreasing below three years for the first time since 2006, during 2016-2018. This will be supported by the city's continued expenditure discipline, as demonstrated over the past three years and improving debt management practices.

Fitch expects direct debt to increase to TRY1.5bn in 2018, due to Bursa's financing needs for ongoing capex investments. This will be supported by the city's continued strong operating surpluses, and solid financial management, keeping the debt payback ratio below three years.

The city is exposed to unhedged FX risk, which is related to its project financing and euro-denominated. In 2014, the share of its FX exposure was 59.5%. Since 2013 the city has not taken on any new foreign-currency denominated debt and there is none envisaged in its three-year plan. Accordingly, Fitch expects the FX share to reduce below 50% of the debt portfolio as of 2018. The weighted average of maturity of its FX debt is 12 years, and its total debt is 10 years as of 3Q15, well above its debt payback ratio.

The lenders of Bursa's FX debt portfolio consist solely of multilateral agencies, such as EIB, EBRD and KfW. For local currency borrowing the city has also good access to various commercial and state owned banks.

RATING SENSITIVITIES
A sharp increase in external and local debt and a deterioration of the deficit before financing to more than 10% of total revenues could prompt a downgrade, although this is not Fitch's base case scenario.

Sustainable reduction of overall risk and continuation of strong budgetary performance with operating expenditure not higher than budgeted would be positive for the Long-term IDRs and National Ratings.