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Fitch Affirms Metropolitan Municipality of Istanbul at 'BB+'; Outlooks Stable
February 24, 2017 / 5:07 PM / 6 months ago

Fitch Affirms Metropolitan Municipality of Istanbul at 'BB+'; Outlooks Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 24 (Fitch) Fitch Ratings has affirmed the Metropolitan Municipality of Istanbul's Long-Term Foreign Currency (LT FC) Issuer Default Rating (IDR) at 'BB+' and Short-Term Foreign Currency IDR at 'B'. Further, Fitch has affirmed Istanbul's Long Term Local Currency (LT LC) IDR at 'BBB-' and National Long-Term Rating at 'AAA(tur)'. The Outlooks are Stable. The affirmation of the LT FC IDR at 'BB+' reflects Istanbul's solid operating performance in line with our unchanged base case scenario, which we expect to continue, due to Istanbul's well diversified and well above-average local economy. This is despite accelerated direct debt due to large capex realisations ahead of 2019 local elections and significant FX risk, The affirmation of the LT LC IDR at 'BBB-' reflects that although the accumulation of direct debt would increase debt-to-current revenue to 85% in 2019 from 61% in 2016, and place the city in the lower level of the 'BBB' category, an expected healthy operating balance should support its debt-to-current balance at two years on average. Further, we expect Istanbul's committed unused bank lines and strong access to financial markets to mitigate immediate liquidity and refinancing risks. KEY RATING DRIVERS Fiscal Performance (Strength/ Stable): Fitch projects Istanbul to post strong, albeit declining, operating margins in the high 40% in 2017-2019. We expect operating margins to fall on the back of higher operating expenditure ahead of the local elections in 2019. In 2016 the operating margin was 47%, slightly higher than an expected 44%, due to the city's well- diversified economy. According to pre-closing 2016 figures the push for large capex realisation at 99.4% against our expectation (82%) worsened the budget deficit before debt variation to 28.6% of total revenue, while capital revenue coverage fell below 10% of capex against an expected 19.2%. For 2017-2019 we therefore expect a continuation of high capex realisations at almost 100% to result in large budget deficits before financing at an average of 22% of total revenue. This is because we estimate the current balance would cover on average only 53% of capex, while capital revenue coverage would be limited at 11% due to a subdued recovery of the local economy Debt (Neutral/ Negative): The push for high capex realisations accelerated debt funding and debt-to-current balance to two years from a strong one year. At the same time, we expect direct debt-to-current revenue to increase to 85%, which if exceeded as a result of capex, would trigger a negative rating action on the LT LC IDR. As a result we have changed the trend for debt and liquidity to negative from stable, on the assumption that debt ratios will be stressed, although the city's operating balance should still be sufficient to cover debt servicing by 20x ( 3-year median: 22x) Fitch expects Istanbul to continue to increase inter-company borrowing at zero cost from its water management affiliate ISKI to TRY5.3bn at end-2019, from TRY3.6bn at end-2016, for which no payment has been made to date. We expect this debt will be netted against the transfer of assets that belong to Istanbul and we classify this debt as direct risk. ISKI is one of the most profitable companies of Istanbul and its debt is negligible with debt-to-current revenue below 1%. Contingent liabilities of the city are low, as most of its companies are self-funding. Their debt accounted for 2.4% of the city's operating revenue in 2016. Istanbul faces significant foreign exchange risk in times of elevated financial volatility as 98% of its debt at end-2016 was foreign currency-denominated and unhedged, up from 97% in 2015. Euro-denominated loans constitute 91% of foreign-currency debt, with the remainder comprising US dollar-denominated loans. The weighted maturity of Istanbul's foreign currency debt was nine years at end-2016, well above the city's expected debt payback (direct debt/current balance) of two years. This, together with the city's several credit lines with state-owned and commercial banks, mitigates short-term refinancing risk. Economy (Strength / Stable): We changed the status on economy to Strength from Neutral as Istanbul is Turkey's main economic hub, contributing on average 25.5% of the country's gross value added in 2006-2012 (latest available statistics), with wealth levels far above the national average. This enables a continuation of fiscal strength and strong access to financial markets and therefore to liquidity. Rapid urbanisation and continued immigration flows challenge the province with a continued need for infrastructure investments. In 2016, the population grew 1.7% yoy to 14.8 million. Fitch expects the national economy to grow on average 2.6% in 2017 -2018, up from a low of 1.8% in 2016, in turn supporting Istanbul's economy and fiscal capacity. Consequently, we have increased our forecast for Istanbul of nominal growth of tax revenues to 13% yoy, from 10%, for 2017-2019 (3-year median at 13.4%) since our last rating action. Management (Neutral/ Negative): Istanbul has a track record of disciplined expenditure policy, and an expenditure realisation rate at about 100% of budgeted total expenditure in the last year. However, we have put a negative trend on the administration due to a lack of an explicit strategy on the repayment of ISKI debt, and bus operator IETT's debt. RATING SENSITIVITIES The rating of Istanbul is at the sovereign rating level. A reduction of city's debt-to-current revenue below 60% on a sustained basis, coupled with continued financial strength and consistent management policies, would be positive for Istanbul's ratings A negative rating action on Turkey would be mirrored on Istanbul's ratings. A sharp increase in Istanbul's direct debt-to-current revenue above 100%, driven by a high materialisation rate of capex and local currency devaluation could also lead to a downgrade of LT LC IDR. 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 Guilhem Costes Senior Director +34 93 323 8410 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 National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019526 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. 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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