December 15, 2017 / 9:21 PM / a year ago

Fitch Affirms Polish City of Szczecin at 'A-'/Stable

(The following statement was released by the rating agency) WARSAW/LONDON, December 15 (Fitch) Fitch Ratings has affirmed the Polish City of Szczecin's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A-'. The Outlooks are Stable. Fitch has affirmed Szczecin's Short-Term Foreign-Currency IDR at 'F2'. Fitch has also affirmed Szczecin's National Long-Term Rating at 'AA+(pol)' with Stable Outlook and National Short-Term Rating at 'F1+(pol). The ratings reflect Fitch's unchanged view that Szczecin will maintain its strong operating performance, supported by strong financial and strategic management. The ratings also reflect the city's high liquidity buffer limiting new borrowings, moderate direct debt levels and manageable debt service ratios. KEY RATING DRIVERS Fitch expects that in the medium term Szczecin will continue to see satisfactory operating performance, with an operating margin of 11%-12% annually and an operating balance on average at around PLN200 million or 3x annual debt service (instalments with interest). In 2016 Szczecin posted a high operating margin of 14% and an operating balance of PLN287 million or over 5x annual debt service. The 2016 results were boosted by a PLN75 million of one-off revenue from VAT returned to the city. Adjusting for this item and also the inflating effects of the Family 500+ transfers, the operating margin would have still been strong at 11.6%. As with many other Polish subnationals, Szczecin faces pressure on its operating expenditure. In 2017 growth of operating expenditure may outpace that of revenue due to pressure on spending stemming mainly from education (due to a reform launched by the state government in all Polish municipalities), and salaries. Additionally, upcoming local elections in 2018 mean Polish cities are unlikely to cut rigid operating expenditure next year. We expect the city's direct debt to remain stable at below 50% of current revenue in 2017 (PLN988 million) before potentially resuming a growth path when investments accelerate. We also assume that the debt payback ratio will be maintained at around five years, well below the city's final debt maturity of 25 years. In 2017 Szczecin did not incur any new debt due to high accumulated cash and lower capex. Fitch regards the city's strong liquidity buffer as a positive rating factor. Cash in Szczecin's accounts plus liquid deposits averaged PLN384 million between January and October 2017. Additionally, Szczecin has an available liquidity credit line of PLN150 million, which the city has not used due to its strong liquidity. Over the medium term, Szczecin's liquidity may partly be deployed for capex financing but should remain healthy. We expect Szczecin to maintain a high level of investments over the medium term, taking advantage of EU funds available for the 2014-2020 period. We expect capex to intensify from 2018 to PLN450 million-PLN500 million or around 17% of total expenditure, above the PLN300 million expected for 2017. Capex financing will largely come from capital revenue and the city's own resources and partly from new debt. Fitch views the city's administration practices as a supportive rating factor. This includes financial discipline and funds accumulation for capex financing as well as efficient cost control. The city's authorities are focused on creating conditions conducive to business development, attracting new investors and improving local infrastructure by taking advantage of the grants from the EU budget for 2014-2020. We also view positively the city's debt policy, which aims to raise long-term low-cost funding from international financial institutions, secure smooth debt repayments and maintain a liquidity buffer to offset FX and floating interest rate risk. Forty-eight per cent of the city's debt is floating-rate and 35% is euro-denominated. Szczecin has around 405,000 inhabitants, making it the seventh-largest Polish city. GRP per capita was 120% of the national average in 2015. Szczecin's economy is diversified, with services playing an important role. The local economy has benefited from improvements in the local infrastructure. This has stimulated business activity and provides the city with higher tax revenue. The unemployment rate in October 2017 of 3.4% was significantly below the national average of 6.6%. The regulatory regime for Polish local governments (LRGs) is reasonably stable. Their activities and financial statements are closely monitored and reviewed by the central administration. Disclosure of the LRGs' accounts is satisfactory. The main revenue sources, such as income tax revenue, transfers and subsidies from the central government are centrally distributed according to a legally defined formula, which limits the central government's scope for discretion. However, local tax rates such as property tax, which LRGs are entitled to collect, are capped by the state. This makes LRGs somewhat reliant on decisions made by the central government and limits their revenue-raising flexibility. RATING SENSITIVITIES The ratings could be upgraded if the city improves its operating performance with an operating margin of above 15% on a sustained basis and maintains a debt payback ratio of below three years, providing the sovereign ratings (A-/Stable) are also upgraded. The ratings could be downgraded if the city's debt payback ratio deteriorates to above eight years, due to a sustained weakening in operating results or a significant rise in the city's direct debt to above 70% of current revenue. Contact: Primary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Renata Dobrzynska Director +48 22 338 62 82 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 99 01 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. 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