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Fitch Affirms MPK Lodz's Revenue Bonds at 'BBB-'
July 13, 2017 / 11:49 AM / 5 months ago

Fitch Affirms MPK Lodz's Revenue Bonds at 'BBB-'

(The following statement was released by the rating agency) WARSAW/LONDON, July 13 (Fitch) Fitch Ratings has affirmed Miejskie Przedsiebiorstwo Komunikacyjne - Lodz Spolka z o.o.'s (MPK) revenue bond programme's long-term local currency secured debt rating at 'BBB-' and National long-term rating at 'A(pol)'. The affirmation reflects the continued sound liquidity of the revenue bond programme and our expectation that it will remain sufficient and well-protected until maturity. We also expect the programme to continue to be ring-fenced from MPK's other operations. The city and its bond programme are credit-linked to its sole owner the City of Lodz, according to our Rating of Public-Sector Entities criteria. KEY RATING DRIVERS The City of Lodz regularly pays MPK remuneration for the Lodzki Tramwaj Regionalny (LTR) tram transport service, the construction of which was financed by the revenue bond programme to the amount of PLN166 million. At end-May 2017 (last settlement date), the outstanding amount under the bonds was PLN86.8 million and accounted for 35% of MPK's debt. The LTR investment is of high importance for the city, which approved its financing through revenue bonds. We therefore assume that the company as well as the LTR investment and its financing are credit-linked to the city. The assumption is based on the assessment of the following credit factors for the revenue bond programme: Legal Status: Midrange The bondholders enjoy special legal protection. They have first claim on revenue from the LTR transport service, on the equity injections made by the city and also have a pledge on LTR assets that excludes them from the bankruptcy estate. During the programme's lifetime, the City of Lodz is obliged to contract with MPK for the LTR transport service and inject equity into MPK, to help service the revenue bonds over the long term. Strategic importance: Strong MPK is the city's internal public transport operator in the Lodz area and is of strategic importance to the City of Lodz as it fulfils the city's transport responsibilities. The city is committed to ensuring the company's financial viability, including the liquidity of the revenue bond programme. We assume that the city is willing and has the capacity to provide additional financial support if necessary. Control: Strong The City of Lodz has strict control over management, operations, investments and financing of the company. This includes tight control of MPK's cash flows under the revenue bond programme. Integration: Strong The City Lodz's payments under the tram and bus contract, LTR contract and support agreement are included in the city's multi-year financial plan and scheduled until 2032. Revenue from the public sector accounted for 61% of MPK's total in 2016 and historically, the City of Lodz's payments for public transport service accounted for about 12%-15% of the city's operating expenditure. Additional rating factors for the revenue bond programme are: Remuneration for the LTR transport service is stable, at around PLN24 million annually (4% of MPK's revenue). The remuneration and equity injections are paid into the venture account (VA) to ring-fence LTR revenue from MPK's other operating risks. MPK can only access the VA for purposes other than relating to the bond programme if the amount within the account exceeds 12 months of bond service. We project that remuneration for the LTR transport service and the equity injections will exceed the annual bond obligations until 2021 by at least 1.8x, limiting the risk for bondholders. We assume satisfactory liquidity for the revenue bond programme will prevail until maturity in 2030. In the last settlement period (June 2016-May 2017), payments made by the city totalled PLN26.9 million and exceeded the annual bond obligations (PLN9.4 million) by about 3x. RATING SENSITIVITIES The revenue bonds' rating may be downgraded if special protection of the bondholders weakens or if the liquidity of the VA deteriorates significantly. Any weakening in the strategic importance of MPK to the City of Lodz leading to reduced willingness to support the company may cause a rating downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the City of Lodz, leading to deterioration in the sponsor's internally assessed creditworthiness. A full guarantee from the City of Lodz covering all of MPK's obligations under the revenue bond programme or a strengthening of the city's credit profile could lead to a rating upgrade. Contact: Primary Analyst Dorota Dziedzic Director +48 22 338 62 96 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Maurycy Michalski Director +48 22 330 67 01 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Additional information is available on Applicable Criteria Rating Criteria for Public Sector Revenue-Supported Debt (pub. 05 Jun 2017) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) 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. 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