December 2, 2016 / 5:06 PM / a year ago

Fitch Affirms Polish City of Chorzow at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/PARIS, December 02 (Fitch) Fitch Ratings has affirmed the Polish City of Chorzow's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' and National Long-Term Rating at 'A-(pol)'. The Outlooks are Stable. The affirmation reflects Fitch's unchanged base case scenario of stable operating performance with an operating margin of around 6% and expected sharp increase in direct debt that will lead to a deterioration of the debt payback ratio. However, despite debt growth we expect debt service to be manageable in the medium term. KEY RATING DRIVERS The ratings reflect Chorzow's small budget, which makes the city more vulnerable to negative economic shocks in comparison with other Polish cities rated by Fitch. This may represent a risk given extensive investments to be debt-financed over the medium term. We expect the city's direct debt to grow rapidly to around PLN380m in 2018 or 67% of current revenue from an estimated PLN163m in 2016 as Chorzow plans to construct a ring-road at an estimated cost of PLN1.5bn. The city will apply for EU funds of PLN1.2bn. The projected increase in direct debt will lead to a deterioration of the payback ratio (debt-to-current balance) to 13 years in 2018 from an estimated five years in 2016. Fitch projects that Chorzow's operating revenue will grow moderately by 3% on average in the medium term (excluding transfers for new centrally delegated tasks). Fitch projects that Poland's real GDP will grow 3.1% annually in 2017-2018, which should support the development of Chorzow's economy and income tax revenue. Revenue growth from local taxes will stem from collection of overdue taxes rather than expanding the limited local tax base. In its base case scenario, Fitch assumes that operating expenditure will grow in line with operating revenue growth, if the administration continues to exercise operating expenditure restraint. This should result in an operating margin of around 6% over the medium term or an average operating balance of PLN30m, which will be sufficient to cover annual debt service requirements (capital plus interest). The city's liquidity is satisfactory, which we expect to be maintained over the medium term. Cash and liquid deposits in the city's accounts have averaged a monthly PLN18m in 2016. In 2016 Chorzow borrowed PLN50m from EIB, more than needed for capex financing. The surplus PLN12m has been placed in deposits. The city's authorities take a cautious approach to budgeting, which is evident in actual revenue usually being higher than originally budgeted at the beginning of the year. Operating expenditure is monitored during the year. In Fitch view the city's ability to increase its revenue is rather limited, so sustained control over operating spending in the medium term will be key to maintaining the ratings. Chorzow is a small Polish city with around 110.000 inhabitants. Its unemployment rate at end-September 2016 at 7.2% was slightly below the national average of 8.3%. Data for gross regional product for Chorzow itself is not available. Gross regional product per capita in 2014 (latest available data) in the Katowicki sub-region where Chorzow is located was 36% above the national average. However, this ratio is fuelled mainly by the City of Katowice (A-/Stable), the capital of the Slaskie Region and does not fully reflect Chorzow's economy. The regulatory regime for Polish local governments is stable. Their activities and financial statements are closely monitored and reviewed by the central administration. Disclosure in the local and regional government accounts is reasonable. 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. Local tax rates such as the real estate tax are capped by the state. This makes LRGs somewhat reliant on decisions made by the central government and limits their revenue-raising flexibility. RATING SENSITIVITIES A downgrade could result from a sharp increase in debt leading to a debt payback ratio (direct debt/current balance) consistently exceeding 12 years and from deterioration of operating performance. The ratings could be upgraded if the city demonstrates sound operating performance with an operating margin of 6%, coupled with stabilising direct debt at below 50% of current revenue. KEY ASSUMPTIONS Fitch assumes that city will start construction of a ring-road in the medium term, but only if it obtains at least 85% of EU funds for co-financing. Contact: Primary Analyst Magdalena Mikolajczak Analyst +48 22 338 62 85 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Dorota Dziedzic Director +48 22 338 62 96 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 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 Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015773 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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