November 24, 2017 / 9:24 PM / 18 days ago

Fitch Affirms Polish Region of Wielkopolska at 'A-'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/LONDON, November 24 (Fitch) Fitch Ratings has affirmed the Polish Region of Wielkopolska's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A-', and National Long-Term Rating at 'AAA(pol)'. The Outlooks are Stable. Fitch has also affirmed the region's Short-Term Foreign-Currency IDR at 'F2'. The affirmation reflects Fitch's unchanged view that the region will maintain sound operating performance and strong debt service and debt payback ratios, despite pressure on operating spending. KEY RATING DRIVERS Our rating case scenario for 2017-2020 estimates an operating margin of around 20%, which will be lower than the 2016 result (27%), but in line with the region's 2011-2016 average. Higher pressure on operating spending growth is envisaged in the medium term, mainly due to growing maintenance costs as investments are completed, scheduled inspection repairs of the region's own rail rolling stock, as well growing pressure on salaries following the national trend. However, Fitch believes that most of this pressure is likely to be offset by the authorities continuing to be flexible on operating spending and by expected higher income tax revenue on the back of a growing national economy. Wielkopolska has continued to report strong results, with a current balance of PLN234 million at end-3Q17 (end-3Q16: PLN228 million), accounting for more than 30% of current revenue. Strong operating results and slower capex launches resulted in an intra-year budgetary surplus of PLN141 million. Fitch expects the region's expenditure to accelerate during 4Q17 due to seasonality of spending although some of the capex may still slip into 2018. Consequently, in 2017 Fitch projects Wielkopolska's budget to post a deficit of 5% of total revenue as co-financed investments from the 2014-2020 EU budget gather pace. The region is currently rolling out new investments under the 2014-2020 EU programme period. This means Wielkopolska's investments in 2017-2020 could total PLN2 billion or an average 38% of annual total spending. Similar to previous years, Fitch expects the region to finance the majority of its capex (90%) from its current balance, available cash and from the non-returnable investment grants available to Polish local and regional governments (LRGs). This will limit Wielkopolska's recourse to debt over the medium term. In 2017, Wielkopolska intends to repay ahead of schedule a total of PLN115 million of high interest-bearing bonds. The region's direct debt is therefore likely to further decline to about PLN334 million or 33% of current revenue by end-2017 (end-2016: PLN407 million or 42.5%). Fitch expects the region's direct debt to resume an upward trend from 2018 due to investments, but to not exceed 55% of current revenue in the medium term. We assume debt servicing (principal and interest) in 2017-2020 will be around 20% of the operating balance (excluding early repayments), and the debt-to-current balance at two to three years (2017: expected 1.9 years), well below the region's final debt maturity (11 years). During 2017, cash in the region's accounts exceeded debt servicing by 6x (excluding bond repayment ahead of schedule). Wielkopolska has a long track record of cash balances at year-end exceeding scheduled annual debt service requirements for the following year, which is a rating positive. Fitch expects liquidity to be partly absorbed by the region's investments in 2017-2020, but it should remain sound. In per capita terms Wielkopolska has a small budget size, compared with other Polish LRGs with similar ratings. Additionally, as with other Polish regions, Wielkopolska has limited revenue-raising flexibility, since income tax rates are determined by the state. Tax revenue (mostly corporate income tax) averaged 59% of its operating revenue in 2010-2016, making the region's budget vulnerable to economic cycles. However, this is compensated by Wielkopolska's flexibility to adjust spending in the region's budget, as fixed costs have a low share in operating expenditure (staff costs: 24% in 2010-2016), while capex has a higher share of total spending (39% in 2010-2016). Fitch expects the region's tax revenue to continue to grow in 2017-2020, supported by forecast GDP growth of 3.5% per year. Wielkopolska is the third-wealthiest of 16 Polish regions in gross regional product (GRP) per capita. In 2015 (latest available data) GRP was PLN50,790 and 8.5% above the national average. In nominal terms, the region accounted for 9.8% of Poland's GDP. The region's economy is well-diversified and services-orientated, with about 59% of gross value added contribution from the sector (Poland: 63%). Wielkopolska's initiatives to support entrepreneurship, as well as improvement of the regional infrastructure, should show positive results in the medium- to long-term. The regulatory regime for Polish LRGs is fairly stable. Their activities and financial statements are closely monitored and reviewed by the central administration. LRG finances are public and LRGs are obliged to disclose their financial accounts on time and in detail. The main revenue sources such as income tax revenue and 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. RATING SENSITIVITIES Wielkopolska's IDRs are currently constrained by Poland's sovereign ratings (A-/Stable) and a change in the sovereign IDRs will be mirrored in the region's. Sustained deterioration in the region's operating margin or a significant rise in direct debt, resulting in weaker debt payback to above nine years could trigger a downgrade. Contact: Primary Analyst Maurycy Michalski Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 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. 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