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Fitch Affirms Polish City of Bydgoszcz at 'BBB+'; Outlook Stable
September 1, 2017 / 8:10 PM / 21 days ago

Fitch Affirms Polish City of Bydgoszcz at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/LONDON/MOSCOW, September 01 (Fitch) Fitch Ratings has affirmed the Polish City of Bydgoszcz's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB+' and National Long-Term Rating at 'AA(pol)'. The Outlooks are Stable. The affirmation reflects Bydgoszcz's sound operating performance, supported by strong financial management and a growing local economy. The ratings also incorporate moderate debt and healthy debt payback ratios. KEY RATING DRIVERS We expect Bydgoszcz to continue to post an operating margin of around 12% and an operating balance covering 3x annual debt service over the medium term. This is based on the assumption that the city's administration will maintain strict control of operating spending and that revenue from local taxes and fees will continue to grow, supported by the expansion of the city's tax base and a growing economy. In 1H17 Bydgoszcz financial performance was in line with Fitch's projections. At end-June 2017 Bydgoszcz reported a healthy operating balance of PLN178 million (2016: PLN205 million) supported by strong collection of taxesand control over operating spending. We expect the city to post a budgetary surplus of around 2% of total revenue in 2017 (2016: 4%). We expect the city's direct debt to decline in 2017-2018 before rising again from 2019 when investments are expected to accelerate as the city taps the EU funds available for Polish local governments (LGs). Bydgoszcz will co-finance investments with mostly its current balance and partially new debt. We assume that direct debt will decline to below 60% of current revenue in the medium term and that the debt/current balance ratio will be around six years (2016: 5.6 years), below the city's final debt maturity of 21 years. The city is exposed to interest rate risk and, to a lesser extent, FX risk, as all of Bydgoszcz's debt is floating-rate, of which 13% is euro-denominated. Both these risks are mitigated by the city's conservative financial management as the administration tends to budget higher amounts for interest payments than necessary. Bydgoszcz's management practices are a supportive rating factor. The city has rationalised operating spending and taken measures to increase revenue. The city's authorities are focused on creating conditions conducive to business development, on attracting new investors and on improving local infrastructure by taking advantage of the grants from the EU budget for 2014-2020. Fitch forecasts that capex will account for at least 16% of total expenditure over the medium term, with significant spending on roads and public transport. In Fitch's view, the municipal companies' debt does not constitute a major risk for the city's budget as most of these companies are self-supporting and repay debt with their own resources. Municipal companies' debt declined to PLN679 million in 2016 from PLN840 million in 2015 following an early redemption by one of the companies. Over the medium term, Fitch expects debt of municipal companies to continue to decline in line with their redemption schedule. Bydgoszcz is a large Polish city with around 356,000 inhabitants, which make it the eighth-largest among Polish cities. GRP per capita in the Bydgosko-Torunski sub-region, where the city is located, was 104% of the national average in 2014 (latest available data). Bydgoszcz's economy is diversified, with services playing an important role. The local economy has benefited from improvements in local infrastructure leading to increased business activity and, consequently, higher tax revenue. Unemployment in the city is on a declining trend. In June 2017, it was at 4.3%, significantly below the national average of 7.1%. RATING SENSITIVITIES Bydgoszcz's ratings may be upgraded if the city strengthens its operating performance, while maintaining sound debt metrics and its debt payback ratio at below five years on a sustained basis. A downgrade could result from a weakening of the city's operating performance accompanied by a significant increase of debt, resulting in deterioration of the debt payback ratio to beyond 10 years. Contact: Primary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Maurycy Michalski Director +48 22 330 67 01 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: malgorzata.socharska@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. 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