June 9, 2017 / 8:11 PM / a month ago

Fitch Affirms Romanian City of Brasov at 'BBB-'; Outlook Stable

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(The following statement was released by the rating agency) WARSAW/LONDON, June 09 (Fitch) Fitch Ratings has affirmed the Romanian City of Brasov's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks and its Short-Term Foreign Currency IDR at 'F3'. The affirmation reflects Fitch's expectation that the city's sound operating performance will continue in the medium term, supporting the city's strong self-funding capacity. The IDRs factor in healthy debt service and debt payback ratios in the medium term, as well as the city's low level of debt. The IDRs also reflect substantial indirect risk stemming from the high level of liabilities of Centrale Electrica de Termoficare SA (CET), the city-owned former heating service provider, which is currently under bankruptcy procedure. KEY RATING DRIVERS According to Fitch's base case scenario, Brasov's operating balance will remain sound in 2017-2019, averaging 20% of operating revenue, which would be in line with the historical average from 2012-2016. This will be supported by the city authorities' continued cost-control measures and tax revenue growth, aided by the projected growth of the national economy. This should result in a nominal operating balance averaging RON130 million, which should be sufficient to fund the city's investment plan. In 2016, Brasov's operating balance was high at RON178 million or 30.2% of operating revenue (2015: RON146 million or 25.6%), and above our expectations. Consequently, the city reported a surplus before debt of 26%, improving the city's cash position to RON256 million at end-2016 (2015: RON102 million). Fitch envisages the city's budgetary deficit to average 10% of total revenue in the medium term following the rollout of new investments. We estimate the city's capital expenditure to average RON200 million in 2017-2019 (28% of total expenditure; 2012-2016: average RON113 million or 21%). The city's high cash buffer, high self-financing capability, as well as the availability of EU and state investment grants to Romanian local governments should keep the city's debt financing needs limited in the medium term. Fitch forecasts the city's debt will continue its declining trend until end-2018, with direct risk falling below RON60 million or 10% of current revenue (2016: RON92 million or 16%). Although Brasov does not include any new borrowing in its financial planning for 2017-2020, Fitch assumes that the city may resort to debt from 2018, once investments under the 2014-2020 EU budget are in their final stages. Fitch expects the city's debt service and debt payback ratios to remain healthy. Debt service, projected to average RON20 million annually, is likely to be covered more than 6x by the operating balance. The debt-to-current balance ratio is likely to be around one year, well below the city's final debt maturity of 10 years. Brasov operates five fully owned public sector entities (PSE), which based on preliminary data had a total RON504 million of debt outstanding at end-2016. The majority (79%) relates to CET. Fitch assumes the city is liable for the debt of its companies. However, according to Romanian law, the owner is only liable to the extent of its joint capital (in CET's case it is RON175 million paid in full). Romania's highly centralised budgetary system ensures adequate support and control from the central government. Under the austerity measures implemented during the national economic contraction in 2011 and 2012, the state ensured budgetary rebalancing in local government finances through subsidies and regulatory measures, including expenditure control. Located in central Romania, Brasov is the capital of and the largest city in Brasov County and has over 290,000 inhabitants. The city is a popular tourist destination and has a strategic location in the heart of the country. Fitch expects real GDP growth of 4.8% in 2017 and 3.9% in 2018 for Romania. The local economy is diversified and comparatively wealthy by national standards. In addition to locally generated tax revenue, the city's budget also benefits from central government transfers. RATING SENSITIVITIES Brasov's ratings are constrained by those of the sovereign (BBB-/Stable). Positive rating action would be triggered by an upgrade of the sovereign's ratings providing no changes to our base case. A negative action on Romania's ratings will be reflected in Brasov's ratings. A downgrade could also result if the city's operating performance falls below 10%-12%, leading to sustained weaker debt payback and debt service above 50% of the operating balance, or if there is a significant rise in Brasov's net indirect debt. Contact: Primary Analyst Maurycy Michalski Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Guido Bach Senior Director +49 69 7680 76 111 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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