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Fitch Affirms City of Porto at 'BB+'; Outlook Stable
March 10, 2017 / 5:34 PM / 9 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: Additional information is available on 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 _id=1020407 Solicitation Status here 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. 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. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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