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Fitch Affirms Metropolitan Municipality of Istanbul at 'BB+'; Outlooks Stable
July 7, 2017 / 8:19 PM / 2 months ago

Fitch Affirms Metropolitan Municipality of Istanbul at 'BB+'; Outlooks Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, July 07 (Fitch) Fitch Ratings has affirmed the Metropolitan Municipality of Istanbul's (Istanbul) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB+' and Short-Term Foreign Currency IDR at 'B'. Further, Fitch has affirmed Istanbul's Long Term Local Currency IDR at 'BBB-' and National Long-Term Rating at 'AAA (tur)'. The Outlooks are Stable. The affirmation of the ratings reflects Istanbul's continuing solid operating performance in line with our unchanged base case scenario and expected increase in debt stemming from large capex realisation. Debt servicing would be supported by a healthy operating balance, keeping debt-to-current balance at just below two years. The ratings further take into account the large unhedged FX liabilities of the city and therefore the devaluation risk the city is exposed to. This is partly mitigated by the amortising nature and lengthy maturity of its debt and its predictable non-seasonal monthly cash flows. KEY RATING DRIVERS Fiscal Performance (Strength/ Stable): Fitch projects Istanbul to post strong, albeit declining, operating margins in the high 40s in 2017-2019 (2016: 47%). We expect operating margins to fall on the back of higher operating expenditure ahead of the local elections in 2019. According to 1Q17 interim budgetary results Istanbul had already achieved 27% of the budgeted tax revenue income, including shared tax revenues and transfers received, reflecting continued robust local economic growth. Such tax revenues constitute up to 70% of the city's total income. The city also achieved 13% of its budgeted non-tax revenue, including fees, fines and rental income, due to the seasonality of these items. Total income realisation at end-1Q17 was 22%. Debt (Neutral/ Negative): Debt funding is expected to increase due to significant capex realisation. This is likely to drive debt-to-current balance higher to about two years from a strong one year. In line with our expectations, direct debt-to-current revenue is forecast to increase to about 80% in 2017 from 60% at end-2016. However, the operating balance should remain healthy and support debt-to-current balance at just below two years. Istanbul faces significant foreign exchange risk in times of elevated financial volatility as 98% of its debt at end-2016 was foreign currency-denominated and unhedged, up from 97% in 2015. By currency, euro-denominated loans constitute 91% of the city's foreign-currency debt, with the remainder being US dollar-denominated loans. The weighted maturity of its FX debt was nine years at end-2016, well above Istanbul's expected debt payback (direct debt-to-current balance) ratio of two years. This, together with the city's predictable and non-seasonal monthly cash flows, plus several credit lines with state-owned and commercial banks, mitigates short-term refinancing risk and extends the debt servicing of FX loans. In line with our expectation Istanbul continued to increase intercompany borrowing at zero cost from its water management affiliate ISKI to TRY5.2 billion at end-1Q17, from TRY4billion at end-2016, for which no repayment has been made to date. The city will continue to borrow from its affiliate and increase borrowing to about TRY7 billion at end-2019. We expect this debt will be netted against the transfer of assets that belong to Istanbul and we classify this debt as direct risk. ISKI is one of the most profitable companies of Istanbul and its debt is negligible with debt-to-current revenue below 1%. Contingent liabilities of the city are low, as most of its companies are self-funding. Their debt accounted for 2.4% of city's operating revenue in 2016. Economy (Strength / Stable): Istanbul is Turkey's main economic hub, contributing on average 30.5% of the country's gross value added in 2006-2014 (latest available statistics), with wealth levels far above the country's average. This helps sustain Istanbul's fiscal strength and allows the city to readily access financial markets. Rapid urbanisation and continued immigration flows challenge the city with a continued need for infrastructure investments. In 2016, the population grew 1.7% yoy to 14.8 million. Management (Neutral/ Negative): Istanbul has a track record of disciplined expenditure policy, with spending in 2016 being fully on budget. Nevertheless, significant increases in capex realisation ahead of the local elections will drive debt funding higher, putting pressure on budgetary performance. Also the lack of an explicit strategy regarding the repayment of intercompany loans from ISKI makes the city's contingent liabilities less than transparent. RATING SENSITIVITIES The rating of Istanbul is at the sovereign rating level. A reduction of city's debt-to-current revenue below 60% on a sustained basis, coupled with continued financial strength and consistent management policies, could trigger a positive rating action, provided the sovereign rating is also upgraded. A negative rating action on Turkey would be mirrored on Istanbul's ratings. A sharp increase in Istanbul's direct debt-to-current revenue above 100%, driven by a high materialisation rate of capex and local currency devaluation, could also lead to a downgrade of the Long-Term IDRs. Contact: Primary Analyst Nilay Akyildiz Director +49 69 768076 134 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D - 60311 Frankfurt am Main Secondary Analyst Guido Bach Senior Director +49 69 768076 111 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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