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Fitch Affirms Antalya Metropolitan Municipality at 'BB+'; Outlook Negative
October 13, 2017 / 8:10 PM / 5 days ago

Fitch Affirms Antalya Metropolitan Municipality at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) FRANKFURT/PARIS/LONDON, October 13 (Fitch) Fitch Ratings has affirmed the Metropolitan Municipality of Antalya's (Antalya) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+' and Short-Term Foreign and Local Currency IDRs at 'B'. The National Long-Term Rating has been affirmed at 'AA+(tur)'. The Outlooks are Negative. The ratings reflect the continuing stable operating performance of Antalya despite a sluggish recovery of the local economy, as well as its high direct risk and an unhedged FX exposure. The Negative Outlook reflects Antalya's volatile budgetary performance and a still weak current balance, which is expected to cover on average less than 50% of the municipality's capex in 2017-2019. This in turn is likely to put pressure on budgetary performance and the ability of Antalya to fulfil its investment brief as a metropolitan municipality. KEY RATING DRIVERS Weakened Operating Balance Fitch expects Antalya's operating margin will increase on average to 20% against our prior estimate of 18% (2016: 24%), backed by a forecast average 13% annual growth of the national economy in nominal terms in 2017-2019. The latter should translate into higher transfers to Antalya, taking operating revenue growth to a CAGR of 9% in 2017-2019. We expect opex to exceed operating revenue by CAGR of 1.2% in 2017-2019 against our prior estimate of 2.7% over the same period. Nevertheless, the operating balance is unlikely to be strong enough to support the current balance amid rising interest rates. As a result, coverage of capex by the current balance is projected to remain below 50%, in line with our estimate (2016: 41%).This would worsen the deficit before financing and strain budgetary performance. In its 2017 budget the city envisaged covering 65% of its capex by capital revenue, through a large asset sale in the Kepezalti district. As the real estate tender has yet to be completed, due to the local economy's unfavourable conditions, Fitch expects that Antalya would only cover 28% of its capex by capital revenue in 2017 and 40% in 2018-2019. Accordingly, we have revised downwards our capex realisation to 35% of the budgeted amount (from 80%) or 29% of total expenditure for 2017 and 50% of the budgeted amount (from 65%) or 35% of total expenditure for 2018-2019. In Fitch's view, strict control over opex and moderate capex realisation no higher than 50% of the budgeted amount, coupled with continuing moderate operating revenue growth, would help shrink the deficit before financing to 5% of total revenue (2016: 23%) over the medium term. Subdued Local Economic Growth We expect Antalya's local economy to have a slower recovery than other Fitch-rated Turkish cities as the national economy rebounds in 2017-2019. Although Antalya is Turkey's seventh largest contributor by GDP per capita, the concentration of its local economy on tourism and agriculture makes the city less resilient to adverse shocks. Debt Payback Strong despite Increase Despite expected increases in debt Fitch forecasts direct debt to remain below 60% of current revenue over the medium term (2016: 46%). The increase in debt will be solely driven by rising capex ahead of elections in March 2019. Despite a weaker current balance, direct debt payback - which is a measure of debt sustainability - should average about three years in 2017-2019 (2016: 2.1), which is still in line with the 'BB' category peers of 3.1 years. We expect currency volatility to increase pressure on the debt servicing costs of the city's unhedged FX liabilities, as 74% of the city's debt is denominated in foreign currency. This could lift projected annual external debt servicing costs to an average 20% of the expected current balance, which should still be manageable for Antalya. In addition, the weighted average maturity of Antalya's external debt of about 12.5 years, an amortising debt structure, predictable monthly cash flows and a Treasury repayment guarantee on the city's debt mitigate immediate refinancing risk. The credit profile of Antalya is constrained by a weak Turkish institutional framework. This is due to a short track record of stable relationship between the central government and the local governments with regard to the allocation of revenue and responsibilities relative to their international peers. RATING SENSITIVITIES A sharp increase in local and external debt with an increase of debt-to-current balance to above four years as a result of larger-than-budgeted opex and capex could prompt a downgrade. A downgrade of the sovereign could also put Antalya's ratings under pressure. 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 Christophe Parisot Managing Director +33 1 44 29 91 34 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 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. 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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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