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Fitch Downgrades Bursa to 'BB'; Outlook Stable
May 26, 2017 / 9:47 PM / 5 months ago

Fitch Downgrades Bursa to 'BB'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Metropolitan Municipality of Bursa - Rating Action Report here FRANKFURT/LONDON, May 26 (Fitch) Fitch Ratings has downgraded Metropolitan Municipality of Bursa's (Bursa) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'BB' from 'BB+' and the National Long-Term Rating to 'AA-(tur)' from 'AA(tur). The Outlooks are Stable. The downgrade of the ratings reflects Bursa's higher-than-expected debt increase, induced by a significant increase in capex, which together with higher opex, led to a deterioration of the debt-to-current balance ratio above our negative rating action trigger of four years at 5.4 years at end-2016. The Stable Outlooks reflect Fitch's view that the expected debt ratios will remain in line with the current rating KEY RATING DRIVERS The rating change reflects the following rating drivers and their relative weights: HIGH Fitch estimates that Bursa will not be able to cut back capex investments prior to local elections, which would lead the debt payback ratio to increase further on average to six years in 2017-2019, above our negative rating action trigger at four years. Furthermore, accumulation of the expected debt would increase its debt burden on average to 145% of current revenue, which is higher in comparison to its international peers on the same rating level. Among its national peers, the debt stock of Bursa has the lowest share of unhedged external debt (2016: 42.3%), but expected currency volatility could increase fiscal pressure on the debt servicing costs of the city's unhedged liabilities. The latter would make up 40% of its total debt stock in 2017-2019. However, the lengthy weighted average maturity of Bursa's total debt stock, at 10.9 years, and predictable monthly cash flows with Treasury repayment guarantee mitigate immediate refinancing risk. Net overall risk-to-current revenue increased significantly to 208% in 2016 from 141% in 2015, which is mainly limited to the debt stock of the city's water and waste water management affiliate BUSKI. The indebtedness of Bursa's companies is otherwise low at 3.2% of the city's operating revenue at end-2016. Law 6360 implemented in March 2014 has enlarged the city's boundaries by increasing the number of Bursa's districts to 17 from seven, creating significant capex investments for BUSKI. We therefore expect net overall risk to remain high at about 200% of the city's current revenue in 2017-2019. MEDIUM Fitch expects the operating margin will decrease on average to 31% yoy (2016: 34%) on the back of opex pressure, which we estimate to surpass operating revenue growth by about 2% in 2017-2019 before gradually declining. The city's operating revenue base would remain robust and grow on average by 15% during the same period, but lax cost control in the pre-election period would put pressure on operating performance. At end-2016, opex increased 19.7% yoy due to increase in goods and services costs mainly related to the city's new responsibilities as well as capex-related service purchases. However, operating revenue growth remained subdued at 4.3% due to adverse effects from the national economy. A significant spike in capex led to a large deficit before financing at 39% of total revenue in 2016, with an overall deficit of 12% of total revenue. The overall deficit would be mainly covered by new borrowings, increasing the city's debt burden. In Fitch's view, strict control of opex and moderate capex, coupled with continued solid operating revenue growth, would help shrink the deficit before financing to 5% of total revenue over the medium term, which would be fully covered by cash. A weakened operating balance and increasing interest costs as a result of a capex-induced debt increase means the current balance will be under pressure and cover on average 49% of expected capex (2016: 37%). This will lead to a large budget deficit before financing, averaging 12% of total revenue. Coverage of capex by current balance remains weak, resulting in substantially higher debt funding. The city's authority's budgetary policy and financial planning is improving so that funding of large capex investments could be covered in a timely manner. .Furthermore, the administration's disclosure of financial planning or additional information on the various funding instruments for its capex programmes is highly transparent. Bursa's ratings also reflect the following key rating drivers: Bursa's credit profile is constrained by the weak Turkish institutional framework, reflecting a short track record of a stable inter-governmental relationship between the central government and local governments with regard to allocation of revenues and responsibilities in comparison with their international peers. Bursa is Turkey's fourth-largest contributor to GDP, contributing on average 4% in 2004-2014 (last available statistics). The metropolitan city is the fourth-largest city of Turkey by population, and accounted for 2.9 million people in 2016. The city is the main hub for the country's automobile and automotive industry, followed by steel production, textile and food-processing industries. RATING SENSITIVITIES A negative rating action would be triggered by Bursa's inability to adjust capex in relation to its current balance and to apply cost control, undermining the sustainability of budgetary performance, and by a debt-to-current revenue ratio above 170%. Sustainable reduction of overall risk closer to 100% from its current 145% and continuation of sound fiscal performance with a current margin sufficient to cover at least 60% capex together with opex being in line with the city's budget could trigger a positive rating action 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. 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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