December 7, 2017 / 10:12 PM / a year ago

Fitch Rates Polish City of Czestochowa 'AA(pol)'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/LONDON, December 07 (Fitch) Fitch Ratings has assigned the Polish City of Czestochowa a National Long-Term rating of 'AA(pol)'. The Outlook is Stable. The rating reflects Fitch's view that the city's healthy operating performance will be maintained over the medium term, supported by prudent financial management. The rating also reflects the city's moderate debt levels and low debt financing needs over the medium term, translating into sound debt service ratios. KEY RATING DRIVERS Fitch expects Czestochowa to continue its healthy operating performance in 2017-2019. In our base case scenario, we estimate an operating balance of about PLN90 million per year or about 8% of operating revenue in 2017-2019, which would cover projected debt servicing 1.8x (about PLN50 million annually including debt repayment and interest). This will be underpinned by the city's prudent budgetary and financial policy, including ongoing rationalisation of operating spending, as well as by tax revenue increase following economic expansion. Based on the city's preliminary data Fitch continues to expect a small budget deficit of 1% of total revenue (nominally about PLN15 million) for 2017. The budget deficit may widen to 2% in 2018-2019 but should still remain small, in comparison to the city's peers, despite the roll- out of investments that are co-financed from the 2014-2020 EU budget. Fitch projects that the city's investments could total PLN600 million in 2017-2019 (on average 15% of annual total expenditure), of which almost PLN160 million is expected for 2017. We expect that about 90% of the investments will be funded by the city's current balance and capital revenue (mainly EU grants), with only 10% by debt. Czestochowa has a moderate debt burden and lower appetite for new debt than its peers. Therefore over the medium term Fitch expects the city's debt-to-current revenue to remain stable at about 40%. For 2017, we forecast debt to total about PLN450 million. Debt-to-current balance is likely to remain at about six years, well below the city's final debt maturity of 15 years. A new long-term PLN250 million European Investment Bank loan to be drawn in 2017-2021 is likely to fully cover the city's debt needs arising from its investments that are co-financed from the 2014-2020 EU budget. Fitch expects Czestochowa's tax revenue growth to be supported by Poland's GDP growth, which the agency forecasts at 4.4% for 2017 and 3.6% for 2018. The city's local tax base is well-diversified, but is weaker than cities that are capitals of Polish regions, which may therefore constrain tax revenue growth in the medium term. GDP per capita in 2015 (latest available data) for the Czestochowski sub-region, which includes the city and surrounding villages, was 85.3% of the national average. We estimate the city's wealth indicators are on a par with the national average, as Czestochowa is the strongest city in the sub-region. The location of two special economic zones within the city is supportive of local economic development. Fitch assesses the regulatory regime for Polish local and regional governments (LRGs) as neutral to the rating. LRGs' activities and financial statements are closely monitored and reviewed by the central administration. LRGs' finances are public and LRGs are obliged to disclose their financial accounts on a timely basis and in detail. The main revenue sources such as income tax revenue, 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 Czestochowa's rating could be upgraded if the city strengthens its financial flexibility and operating performance, while maintaining sound debt metrics and its debt payback ratio below five years on a sustained basis. A downgrade could result from a weakening of the city's operating performance, accompanied by significant increase of debt, resulting in deterioration of the debt payback ratio towards 10 years on a sustained basis. Contact: Primary Analyst Renata Dobrzynska Director +48 22 338 62 82 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:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Additional information is available on 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 Solicitation Status here 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. 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