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Fitch Rates Manisa Metropolitan Municipality 'BB'; Outlook Stable
October 13, 2017 / 8:10 PM / 2 months ago

Fitch Rates Manisa Metropolitan Municipality 'BB'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Manisa Metropolitan Municipality - Rating Action Report here FRANKFURT/LONDON, October 13 (Fitch) Fitch Ratings has assigned Manisa Metropolitan Municipality (Manisa) a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB', a Long-Term Local Currency IDR of 'BB+' and a National Long-Term Rating of 'AA(tur)'. The Outlooks are Stable. The 'BB+' Long -Term Local Currency IDR reflects Manisa's strong and stable track record of operating margins averaging at 42%, above the 8.6% median for its international 'BB' category rated peers, due to a buoyant local economy and cost discipline. The ratings also factor in sound debt ratios although increasing capex since Manisa became a metropolitan municipality in 2014 has fuelled debt rise. Nevertheless, we expect debt ratios to remain healthy with direct debt-to- current balance remaining below two years. The 'BB' Long Term Foreign Currency IDR reflects a lack of track record of Manisa's foreign debt servicing capacity, as the city currently does not have foreign debt. However, the city is planning to borrow in foreign currency after 2018. The Stable Outlook reflects expected strong operating performance, which will support the capex-led increase in debt, in turn keeping the direct debt-to-current balance - a measure of debt sustainability - at below two years. KEY RATING DRIVERS The ratings reflect the following rating drivers and their relative weights: HIGH Strong Operating Margins In contrast to other Fitch-rated Turkish Metropolitan Municipalities such as Istanbul (BB+/BBB-/Stable), Izmir (BB+/BBB-/Stable), Bursa (BB/BB/Stable) and Antalya (BB+/BB+/ Negative), Manisa only became a metropolitan municipality recently with the introduction of Law 6360 in 2014. Manisa's shared tax revenue increased in nominal terms by 70.5% yoy in 2013-2014 and the city has also started to receive allocations from the national government to metropolitan municipalities based on their respective population and area, which Fitch classifies as transfers. Shared tax revenue, together with the transfers, boosted operating revenue on average about 80% yoy during 2014-2016, compared with 50% before Manisa's metropolitan status. Operating revenue growth also picked up to 16% yoy during this period, from 10% in 2014. Manisa's operating margins averaged a strong 42% per year over 2012-2016. Although they are moderate compared with its national peers such as Istanbul (56%) and Izmir (57%) these two cities have far stronger financial capacities, together accounting for 36.3% of national GDP. Manisa's operating margins are similar to those of Bursa at 42.3% and far exceed Antalya's 14%. This is mainly due to strict cost control, which enabled the city to adjust its expenses in times of economic slowdown while still carrying out its investments (40% of total expenditure) in 2012-2016. Fitch projects that the city would post operating margins of about 40% in 2017-2019, supported by a diverse tax base, a buoyant local economy and cost restraint. Fitch expects Manisa to gradually increase capex to close to 45% of total expenditure in 2017-2019, which is above Istanbul's and Izmir's 50% and Bursa's and Antalya's near 45%. Seventy per cent of capex will be funded by the current balance and the remainder by borrowing. Sound Debt Ratios Fitch expects that Manisa's direct debt will increase to about TRY613.8 million at end-2019 from TRY277.7 million in 2016. The increase in debt is solely attributable to the infrastructure projects that the city needs to realise within its new metropolitan responsibilities. However, expected strong operating margins should help keep the debt-to-current balance at below two years. At end-2016 Manisa's direct debt amounted to TRY277.7 million, all domestic bank loans. To date, the city has not taken on any foreign debt. However, the administration has plans to borrow in foreign currency for its capex from 2018 onwards, due to favourable terms and conditions. The city also has already contracted bank loans for its expected funding requirements (2017-2018) of TRY510 million. The loans - which are approved by the municipal council - are mainly from Halk Bank, Ziraat Bank, Ziraat Katilim Bank, Vakif Bank (all state-owned banks) and commercial bank Deniz Bank. Manisa's loan portfolio has an amortising structure with no bullet repayments. Its total debt has a weighted average maturity (WAM) of 7.5 years. A longer maturity, together with an amortising debt structure and satisfactory liquidity levels at about 7.3% of its operating revenue, mitigate immediate refinancing risk. Public Sector Newly Formed Manisa's public sector consists of only one public entity (water services provider) and three municipally owned companies operating in public service areas, complementing municipal services. All municipal companies are fully owned by the metropolitan municipality directly, but they have their own budgets and are subject to private law. So far, Manisa has not issued any guarantee on the liabilities of its public sector. Similar to other metropolitan municipalities, the most indebted municipal entity is the water services provider (MASKI). The other companies do not represent indirect risk to Manisa as they have no financial debt. MASKI serves the total metropolitan area (13,810 km2) of Manisa. At end-2016, the entity's debt - all amortising - totalled TRY178.5million. As with Manisa, MASKI does not have foreign debt. MASKI's debt is self-financed and the company has not required any subsidies or transfers from the municipality. MEDIUM Institutional Framework Constraint Manisa's credit profile is constrained by a weak Turkish institutional framework, reflecting a short track record of stable relationship between the central government and the local governments with regard to allocation of revenue and responsibilities in comparison with their international peers. Diversified Economic Base Manisa is a province in Western Turkey located in the Aegean region at the border of Izmir. After Law 6360, the province acquired the Metropolitan Municipality status in 2014 and its boundaries (1,231.8km2) were enlarged to the provincial boundaries (13,228.5 km2). Out of the 30 metropolitan municipalities, Manisa is the 14th-largest city by population and the 19th-largest by budget size. Its GDP per capita (USD 11,112 at end- 2014) was 6% above the mean of metropolitan municipalities' GDP per capita, but 8% below the national average. Nevertheless, its diversified economy means Manisa has a below-national average unemployment rate, at 4.8% at end-2016 versus Turkey's 10.9%. Manisa is the second-largest industry and trade hub in the region after Izmir. Unlike other neighbouring cities, Manisa has a more diverse economic structure that includes industry, agriculture and service sectors. The "Manisa Industrial Zone" is also the seventh-largest in Turkey through employment. Manisa is also rich in mining resources and plays a large role in the country's agriculture, contributing 6% to the sector's output. The city owns one of the richest lignite ores of the country, which is used to produce electricity at the "Soma Power Plant", one of the largest and important production units in Turkey. The mining sector and the Soma Power Plant are significant contributors to the employment base. Manisa's ratings also reflect the following key rating drivers: Coherent Management The city mayor's priorities are to continue the strong budgetary performance so that the metropolitan municipality can undertake large investments. Furthermore the administration is focused on transport, including construction and extension of roads, improving road infrastructure for the newly added metropolitan areas (bridges, underpasses) and creating new parking spaces. RATING SENSITIVITIES A positive rating action could result from sustained reduction of the debt-to-current revenue to below 50% from an expected 70% in 2017-2019, continuing sound fiscal performance with a current balance which covers at least 60% of capex (2016: 71%) and on-budget operating expenditure. A downgrade could result from an inability to both adjust capex in relation to Manisa's current balance and to apply cost control, and a weakening of budgetary performance with the debt-to-current balance ratio rising above four years. 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 Christophe Parisot Managing Director +33 1 44 29 91 34 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. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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