October 20, 2017 / 8:17 PM / a year ago

Fitch Upgrades City of Tallinn to 'A+'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: City of Tallinn - Rating Action Report here FRANKFURT/WARSAW/LONDON, October 20 (Fitch) Fitch Ratings has upgraded the Estonian City of Tallinn's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'A+' from 'A' and Short-Term Foreign Currency IDR to 'F1+' from 'F1'. The Outlooks are Stable. The upgrade expresses our view that the city's improvement in fiscal performance is sustainable, which should underpin sound liquidity and strong debt payback and debt service ratios. This, combined with prudent management, should keep the city's net overall risk moderate. The ratings reflect also moderate direct debt, a high self-funding capacity of investments, a well-diversified but modest-sized local economy, and a stable regulatory regime. The Stable Outlook reflects our view that in the medium term Tallinn's credit quality will be in line with 'A+' peers'. KEY RATING DRIVERS The upgrade reflects the following key rating drivers and their relative weights: HIGH Structural Improvement Sustainable: We expect that the city's operating performance will remain sound, with an operating margin of 12%-13% in 2017-2020. We believe that Tallinn's prudent management practices in the last years have allowed the city to overcome its structural limitations. This is demonstrated by the significant improvement of the city's operating margin to 13% in 2016 and an expected 13% for 2017, from an average of 7.4% reported in 2012-2015. The improvement is attributable to the city's efforts to slow operating expenditure growth. Healthy Debt Service: Based on our forecast of a strong current balance we project Tallinn's debt payback ratio (debt/current balance) to improve to an average of 2.5 years in 2017-2020 (2016: 2.8 years), much lower than the average of seven years reported in 2012-2015. Debt service should remain healthy despite its growth to about EUR25 million annually in 2018-2020 from a low EUR12 million in 2017. In addition, the city's sound cash balance should comfortably cover annual debt service by at least 2x during 2017-2020. Sound Management Practice: We expect Tallinn's management practices to remain sound. We believe that the city will continue its strict cost controls and efficiency improvements to strengthen the current balance and secure funds for investments as well as limit debt increase. We also assume that Tallinn will continue with its active debt and liquidity management and will keep contingent liabilities under strict control. MEDIUM Supportive Institutional Framework: We assume the sustainability of Tallinn's sound operating performance should be supported by recent central governments measures aimed at strengthening Estonian local governments. According to the measures, Tallinn should get at least EUR30 million additional personal income tax (PIT) revenue in total in 2018-2020. We expect PIT revenue growth will be also fuelled by expected national economic growth of more than 3% annually and by continuous wage increases of about 5% annually in the medium term. Low Debt Pressure: We expect the city's debt to stabilise in the medium term as it may only fall to EUR180 million at end-2020 from EUR188.6 million at end-2016, although in 2017 it may grow by EUR10 million due to expected larger capital expenditure. Nevertheless, during the forecast period 2017-2020 debt should remain moderate at below 30% of current revenue (2016: 35%). The low debt pressure stems from the city's balanced investment programme and a high self-finance capacity of investments. We project the net overall risk-to-current revenue ratio will fall to 30% by 2020 from an expected 43% at end-2017 (2016: 43%) due to an expected decline in the debt of municipal companies. The city's ratings also reflect the following key rating drivers: Unhedged Interest Rates: More than 90% of Tallinn's debt has unhedged floating rates, but interest-rate risk is limited by the city's prudent debt management and by the city's sound liquidity. Tallinn's cash at end-2016 was more than 4x the city's annual debt service. Although some of the cash will be used to fund investment and repay liabilities arising from long-term co-operation agreements it should cover debt service by about 2x in 2017-2020. Wealthy but Small Economy: Tallinn, as the economic centre of Estonia, contributes more than 50% of national GDP. Its GDP per capita was 167% of the national average in 2016. The unemployment rate in Tallinn was 6.1% in 2016 (2015: 5.4%), just below the national average. The city is service-oriented and its wealthy economy results in high tax revenue for the city. However, reliance on tax revenue leaves Tallinn vulnerable to macroeconomic shocks. RATING SENSITIVITIES The ratings could be upgraded if Tallinn improves its operating performance with an operating margin above 16% on a sustained basis and maintains a debt payback ratio of below two years, providing the sovereign ratings (A+/Stable) are also upgraded. A negative action on Estonia's ratings will be reflected on Tallinn's ratings. Negative rating action could also result from a sustained deterioration in operating performance or a significant rise in Tallinn's direct debt, leading to the city's debt payback ratio exceeding seven years. Contact: Primary Analyst Dorota Dziedzic Director +48 22 338 62 96 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Guido Bach Senior Director +49 69 768076 111 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. 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 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. 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