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Fitch Revises Polish City of Chorzow's Outlook to Positive; Affirms at 'BB+'
November 24, 2017 / 9:18 PM / 23 days ago

Fitch Revises Polish City of Chorzow's Outlook to Positive; Affirms at 'BB+'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: City of Chorzow - Rating Action Report here WARSAW/LONDON, November 24 (Fitch) Fitch Ratings has revised the Polish City of Chorzow's Outlook to Positive from Stable while affirming the city's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' and National Long-Term Rating at 'A-(pol)'. Today's rating action reflects our view that with the abortion of the plan for ring road construction the Chorzow's debt requirements will be much lower than expected. Consequently the city's forecasted debt stock and debt payback ratio would no longer be commensurate with the current ratings. If at the same time the city's fiscal performance would stabilise it could lead to a rating upgrade. KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: HIGH We project the city's direct debt to grow to around PLN260 million by end-2020 from the PLN194 million expected at end-2017. Total debt by end-2020 would be significantly below our previous projections of PLN440 million as the city will no longer need to raise a large debt amount to finance the ring-road construction (city's share in the investment cost: PLN570 million). The project has been aborted as EU grants that were expected to cover at least 85% of the investment costs were not available. The projected debt growth is to finance capital expenditure. About 70%-80% of capital expenditure will be financed from capital revenue and from the current balance, with the remainder to be funded by a loan from the European Investment Bank. We expect capital expenditure to total up to PLN340 million in 2018-2020, or 15%-17% of Chorzow's total expenditure. Fitch expects debt should remain below 50% of current revenue by end-2020 (2017: estimated 35%) in contrast to the 80% projected previously and the payback ratio (debt-to-current balance) at eight to nine years in 2020 (2017: estimated seven years), compared with 16 years in our previous projections. Thus debt metrics will be more comparable to higher-rated local governments'. The city's cash balances are high for the current rating level as they have been in excess of the annual debt service (principal and interest) since 2014, which is a credit positive. We expect that the city will maintain sound cash balances over the medium term. Cash and liquid deposits in Chorzow's accounts averaged PLN13 million in January-September 2017. Combined with the accumulated cash from previous years (end-2016: PLN19.4 million) cash would exceed the annual debt service of about PLN14 million in 2017. In addition, Chorzow is considering repaying early around PLN10 million of its high interest-bearing debt this year, which would worsen its debt service ratio to 77% of operating balance in 2017 (45% without), compared with 35.5% in 2016. MEDIUM Fitch expects the city will maintain its operating margin at around 6% (2016: 5.5%) in the medium term. It translates into average operating balances of PLN35 million annually (2016: PLN29.4 million). In 2017, the operating balance may be lower due to additional current spending for education as result of the state reform. However, we assume the balance may exceed the PLN20 million expected by the city. Nevertheless the operating balance should cover debt service by at least 1.4x during 2017-2020, despite expected debt service growth to about PLN27 million in 2020 (2016: PLN10.4 million). The city's ratings also reflect the following key rating drivers: Chorzow's approach to budgeting is cautious, given inflexible current revenue and expenditure. The city has a low share of income taxes in operating revenue (24% in 2016), which makes it reliable on grants from the state budget (50%) that are mostly deployed to financing defined tasks. In addition, the local economy faces competition from the neighbouring City of Katowice (A-/Stable), the capital of the Slaskie Region, for potential investments. Chorzow is a small Polish city with around 110.000 inhabitants. Its unemployment rate at end-September 2017 was 6.3% (national: 6.8%) compared with 2.3% in Katowice. Data for gross regional product for Chorzow is not available. Gross regional product per capita in 2015 (latest available data) in the Katowicki sub-region where Chorzow is located was 35% above the national average. However, this ratio is fuelled mainly by Katowice and does not fully reflect Chorzow's economy. The latter's small size makes Chorzow's budget more vulnerable to negative economic shocks than other Polish cities rated by Fitch. RATING SENSITIVITIES The ratings could be upgraded if the city demonstrates on a sustained basis stable operating performance that covers annual debt service and translates into a payback ratio of below 10 years. Contact: Primary Analyst Dorota Dziedzic Director +48 22 338 62 96 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 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; 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. 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. 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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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