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Fitch Revises City of Rzeszow's Outlook to Positive; Affirms at 'BBB'
September 30, 2016 / 4:06 PM / a year ago

Fitch Revises City of Rzeszow's Outlook to Positive; Affirms at 'BBB'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: City of Rzeszow - Rating Action Report here WARSAW/LONDON, September 30 (Fitch) Fitch Ratings has revised the Polish City of Rzeszow's Outlook to Positive from Stable and affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' and the National Long-Term Rating at 'AA-(pol)'. The change of Outlooks reflects Fitch's base case scenario that Rzeszow will continue to improve its operating performance in the medium term, with the operating balance growing to above 10% in 2016-2018 and the debt-to-current balance ratio strengthening to about eight years, despite an expected increase in debt from 2017 as a result of investments. The ratings reflect the city's medium-sized but rapidly growing local economy as well as solid strategic and financial management. All these strengths translate into healthy operating performance, which supports the city's strong self-financing capacity for investments. The ratings also factor in the city's moderate direct debt. KEY RATING DRIVERS The revision of the Outlook reflects the following key rating drivers and their relative weights: HIGH In its base case scenario Fitch's assumes that Rzeszow will further improve its operating performance in 2016-2018. We expect the city's operating balance to grow to around PLN100m, above the 2011-2015 average of PLN56m. This will be driven by continued sound financial management and an effective policy to limit opex growth, and growing tax revenue on the back of local economic growth and a developing tax base. The city's improved operating results will strengthen the debt-to-current balance ratio to around eight years in 2016-2018, from an average 12 years in 2011-2015. This ratio will compare well with the city's final debt maturity of up to 24 years. In 2016 the city's capex is likely to more than halve from 2015's PLN367m (30% of total expenditure), leading Fitch to project a small budget surplus. However, for 2017-2018 we expect the city to post a budget deficit of about 1%-3% of total revenue as new investments co-financed from the EU budget 2014-2020 intensify. In 1H16 Rzeszow posted a large budget surplus of PLN82m (in 1H15: PLN31m budget deficit) due to prolonged delays in launching EU capex programmes at the national level and the receipt of PLN42m of EU refunds on projects completed in 2015. The city has successfully obtained EU and state grants for infrastructure developments and Fitch expects this to continue during the EU2014-2020 budgetary period. We assume Rzeszow's investment in 2016-2019 will total PLN1bn (on average 25% of annual total expenditure), with almost 80% being funded by capital revenue and current balance, and the remainder by new debt. MEDIUM Fitch expects the city's debt will remain stable in nominal terms at PLN643m in 2016, before growing from 2017 by PLN50m annually on the back of investments. Debt will, however, remain moderate, at about 66% of current revenue. Rzeszow has secured a new PLN400m EIB loan to be drawn in 2016-2022, with long maturity and a smooth debt repayment profile, which will allow Rzeszow to maintain its healthy debt service ratio. Debt service, projected to average PLN60m in 2016-2018, will be covered 1.6x by the operating balance. Fitch views management practices as a supportive rating factor. This includes the city authorities' focus on creating conducive conditions for business development in the city and attracting new investors. Rzeszow is seeking to improve the efficiency of its public services delivery, and continuing with its spending rationalisation and cost control. With about 187,000 inhabitants, Rzeszow is an economic engine of south-east Poland. It has been experiencing accelerated economic growth in the past few years, above the national level, which has led to faster growth of tax revenue than peers. High positive net migration (2014: 2.3 per 1000) and a high birth rate (3.3 per 1000), together with a large student influx, demonstrate the city's attractiveness. GDP per capita has risen rapidly in the Rzeszow sub-region, in which the city is located, to 87.9% of the national average in 2013 (latest available data) from 74% in 2007. Fitch believes that the city's wealth indicators are above the national average, as the city is the strongest area in the sub-region. The city's ratings also reflect the following key rating drivers: Fitch assesses the regulatory regime for Polish LRGs as neutral. LRGs activities and financial statements are closely monitored and reviewed by the central administration. Disclosure in the LRGs' accounts is more than adequate. 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 The ratings could be upgraded if Rzeszow maintains strong operating balance on a sustained basis, and if diminishing recourse to debt results in an improvement of the debt-to-current balance ratio to below 10 years. 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 at Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012477 Solicitation Status here Endorsement Policy here ail=31 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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