(The following statement was released by the rating agency)
March 14 - Fitch Ratings has revised the Polish City of Kielce’s rating Outlook to Stable from Negative and affirmed its Long-term foreign and local currency ratings at ‘BBB-’ and Long-term National rating at ‘A-(pol)'.
The Outlook revision reflects Fitch’s expectations that the city will continue to successfully rationalise its operating spending, especially in the most rigid sectors, which should lead to an improvement of budgetary performance with an operating margin of at least 6%. Such results would allow Kielce to cover its debt service obligations with ease.
The city’s ratings reflect the improvement in Kielce’s financial management, which is expressed by the curtailing of opex growth and ongoing spending rationalisation. Fitch views that this financial policy should result in a satisfactory budgetary performance in the medium term, which would support the city’s debt service obligations. The ratings also factor in growing, but still moderate debt and continuous pressure on opex growth stemming mainly from decisions of the state government to transfer responsibilities to the local level without adequate financing.
Failure to contain growth in operating expenditure, or weakness in revenue collection from a harsher economic environment, leading to lack of operating performance improvement compared with 2011, could prompt a downgrade. Conversely, a positive rating action could be triggered if the city improves its operating performance above 10% in the medium term leading to healthy debt coverage ratios despite the growing debt.
Located in one of the five poorest Polish regions, the city is entitled to extra EU grants targeted at local governments in such regions. With a projected PLN620m of EU grants for investment in 2007-2013, the city’s priority is to successfully implement the EU co-financed projects, as they should support Kielce’s local economy development. Fitch assumes that in 2012 the city’s capital expenditure may remain at 30% of total expenditure, and then gradually decline in 2013-2014 as the majority of investments should be in their final stages. However, this capex will require partial debt financing.
Fitch projects the city’s debt will grow to 55% of current revenue by 2014 from 46% at end-2011 (nominally PLN386m). However, it would still remain moderate by international standards. Fitch views that an operating balance of at least 6% of operating revenue should be sufficient for Kielce’s to meet its debt service obligations, despite their growth to about PLN46m in 2014. Additionally, as almost all of Kielce’s debt carries floating rates the city is exposed to interest rate risk, therefore maintaing satisfactory budgetary performance is crucial for the city.
Kielce is the capital of the Swietokrzyskie Region, with 203,800 inhabitants and is an important administrative, culture and educational centre in the region.