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Fitch Affirms Municipality of Ostrow Wielkopolski at 'A+(pol)'
July 17, 2017 / 12:17 PM / a month ago

Fitch Affirms Municipality of Ostrow Wielkopolski at 'A+(pol)'

(The following statement was released by the rating agency) WARSAW/LONDON, July 17 (Fitch) Fitch Ratings has affirmed the Polish Municipality of Ostrow Wielkopolski's National Long-Term Rating at 'A+(pol)'. The Outlook is Stable. The affirmation reflects Ostrow's sound operating performance, which we expect to be maintained over the medium term. The ratings reflect also Ostrow's low debt and healthy debt ratios. The ratings further factor in the small size of the city and, as such, limited budget flexibility, which makes it vulnerable to negative changes in economic trends, although this is partially mitigated by prudent financial management. KEY RATING DRIVERS Fitch expects that over the medium term Ostrow will continue to report a healthy operating performance, with an operating margin of around 13% annually and an operating balance on average estimated at PLN30 million or 2.5x-3x annual debt service (instalments with interests). In 2016 Ostrow posted a sound operating margin of 13.5% and an operating balance of PLN33 million or 2.8x annual debt service. Fitch expects direct debt to remain low below 30% of current revenue and the debt payback ratio to be at around two years (2016: 2.2 years), which is the lowest among Ostrow's peers. Limited financing requirements and the city's self-financing capacity mean direct debt should remain stable in nominal terms at around PLN68 million over the medium term (2016: PLN67.6 million). Fitch expects capex to average around PLN37 million annually in the medium term (2016: PLN38 million). The main area of investments will be local infrastructure, including roads and transport, municipal housing and kindergartens. Ostrow will apply for EU funds to co-finance capex. As a municipality Ostrow has different responsibilities, smaller budget and consequently lower flexibility than larger cities rated by Fitch. The small size of the Ostrow's budget makes the city more exposed to adverse changes in the local economy or institutional framework. However, the city's administration takes a prudent approach to budgeting and maintaining a cash buffer for unexpected expenses. It also creates an environment conducive to business and comfortable living conditions to prevent migration of people from the city. The debt of Ostrow's municipal companies totalled PLN54 million in 2016 (2015: PLN58 million). The majority of the public sector entities' (PSEs) debt was from RZZO, which constructed a solid waste treatment plant, a project largely financed from EU grants; and from OTBS, which is responsible for the construction of municipal buildings. In Fitch's view, indirect risk does not constitute a major risk for the city's budget as these companies are self-supporting and repay their debt from their own revenue. Ostrow is a small city, with around 70 thousand inhabitants, but is located close to the capitals of three Polish regions. This makes the city an attractive place to live. Unemployment in the city in 2016 (4.7%) was below the national average (8.3%). However, Ostrow's wealth indicators are weaker than the national average. Gross regional product per capita in the Kaliski subregion, where Ostrow is located, was 13% below the national average in 2014 (last available data). The regulatory regime for Polish local governments (LGs) is reasonably stable. Their activities and financial statements are closely monitored and reviewed by the central administration. Disclosure of the LGs' 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 real estate tax, which some LGs are entitled to collect, are capped by the state. This makes LGs somewhat reliant on decisions made by the central government and limits their revenue-raising flexibility. RATING SENSITIVITIES The rating could be upgraded if operating performance further improves as reflected by the operating margin increasing to 17%-18%, and net overall risk falling below 35% of current revenue on a sustained basis. The rating could be downgraded if operating performance deteriorates, coupled with direct debt rising materially above 35% of current revenue and a debt payback ratio above 10 years. 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 2405 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 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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