March 10, 2017 / 5:34 PM / 5 months ago

Fitch Affirms City of Porto at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, March 10 (Fitch) Fitch Ratings has affirmed the City of Porto's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+'. The Outlooks are Stable. The Short-Term Foreign Currency IDR has been affirmed at 'B'. The affirmation reflects Fitch's base case scenario of stable budgetary performance and low debt metrics, despite moderately growing debt levels over the medium-term. The Stable Outlook reflects that on Portugal (BB+/Stable). KEY RATING DRIVERS Rating Constraint Porto's ratings remain constrained by the Portuguese sovereign, in accordance with Fitch's criteria. The intrinsic credit profile of Porto is stronger than its ratings indicate, due to the city's healthy budgetary performance, low debt, as well as sound liquidity. A prudent administration and Porto's role as service centre in north Portugal are also credit- positive. As with other Portuguese cities, the accounts and budgets of Porto are overseen by the central government and its financial liabilities are approved by the National Court of Accounts. The limited role of the intermediate tiers of government (province and region) in Portugal strengthens the link between the central government and cities. Solid Budgetary Performance Porto has maintained high operating margins through cycles, at above 17% since 2009. This, coupled with flexibility on capex, has allowed the city to report a surplus before debt variation every year over the same period. The 2016 preliminary accounts confirm the city's consistent performance with an operating margin of 24%, partly driven by one-off tax and fee revenue. Preliminary tax revenues of EUR105.2 million in 2016 were up 21.2% year on year. The 2017 draft budget presents a moderate operating revenue forecast of EUR153.1 million. It includes a property tax reduction of 10%, with a marginal effect on overall operating revenue. Nevertheless, it allocates higher opex and capex mostly to street and housing refurbishment, as well as fostering local economic activity. Fitch expects opex to grow above 5% and a marked increase in capex of 30%, after several years of low investments. Fitch's base case scenario expects softer, albeit still robust, budgetary indicators for Porto in 2017, with an operating margin around 15% and the capital account partly funded with debt. Low Debt, Moderate Increase Expected Porto reduced outstanding debt to EUR33.3 million in 2016, from EUR80.1 million in 2015, following a EUR28.7 million expropriation settlement used to redeem debt ahead of schedule. Debt-to-current revenue was at a record low of 18% at end-2016 according to preliminary results, and the administration plans to take on new debt in 2017 of around EUR20 million, to fund rehabilitation of housing and public infrastructure. Fitch expects gradual debt growth, towards 50% of current revenues over the medium-term, after several years of deleveraging. Porto has no contingent liabilities and retains control over the public sector, which posted a surplus in 2016. Elections Forthcoming Elections are scheduled in October 2017, and Fitch expects a continuation of the city's prudent financial policy. Disclosure of information is satisfactory and precise, including the annual financial results of all public bodies within its scope. With an estimated population of 218,000 in 2014, the City of Porto is the second-largest cultural, administrative and economic Portuguese centre, providing services to a greater metropolitan area of 14 municipalities with 1.7 million inhabitants. GDP resumed growth in 2014, and is expected to grow around 1.5%-2% p.a. over the next two years, driven by the healthy performance of the external and hospitality sectors. RATING SENSITIVITIES Porto's intrinsic credit profile is well above the sovereign's, and will continue to be strong under our base case scenario. However, Porto's IDRs are constrained by the sovereign IDRs and are therefore sensitive to changes of the sovereign rating. Contact: Primary Analyst Patricio Novales Associate Director +34 93 323 84 17 Fitch Ratings Espana, S.A.U. Avda. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 84 10 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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