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TEXT-S&P affirms City of Dnipropetrovsk at 'B' and 'uaA-'
September 17, 2012 / 2:47 PM / 5 years ago

TEXT-S&P affirms City of Dnipropetrovsk at 'B' and 'uaA-'

     -- The Ukrainian city of Dnipropetrovsk continues to deliver strong 
operating margins in line with our base case, thanks to economic growth and 
state support. 
     -- Despite existing and planned borrowing, tax-supported debt is likely 
to stay low. 
     -- We are affirming our 'B' and 'uaA-' ratings on Dnipropetrovsk and the 
recovery rating on the city's bond is unchanged at '4'. 
     -- The stable outlook reflects our view that city's adherence to cautious 
expenditure and debt policies and continued central-government support will 
likely result in moderate budgetary performance and low tax-supported debt.
Rating Action 
On Sept. 17, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
long-term issuer credit rating and 'uaA-' Ukraine national scale rating on the 
Ukrainian city of Dnipropetrovsk. The outlook is stable. The recovery rating 
on Dnipropetrovsk's senior unsecured debt remains at '4'.

The ratings on Dnipropetrovsk reflect Ukraine's very weak public finance 
system, which results in low financial flexibility and predictability for the 
city, as well as material contingent liabilities related to municipal 
utilities and a poor and concentrated economy. These constraints are mitigated 
by Dnipropetrovsk's low debt burden and strong financial support from the 
central government.

The central government's control over the lion's share of Dnipropetrovsk's 
revenues and expenditures, and what we consider as Ukraine's "volatile and 
underfunded" system of public finance, significantly reduce Dnipropetrovsk's 
financial predictability and flexibility. 

Material overdue payables of the city's municipal enterprises continue to 
present one of the key rating constrains. Dnipropetrovsk's municipal heating, 
water, and transport companies account for most of the accumulated payables, 
the amount of which has not decreased over the last few years. By year-end 
2011, they totaled slightly more than 30% of the city's total budget revenues. 
The city is not directly responsible for the obligations of these companies. 
The central government regulates municipal tariffs, which continue to be 
artificially low. Nevertheless, in the event of financial stress, moral 
obligations might lead the city to provide help by increasing subsidies or 

We think Dnipropetrovsk's budgetary performance will likely be characterized 
by strong, although volatile, operating margins in the medium term. Despite 
the ongoing experiment, under which the financing of the city's healthcare was 
assumed by the central government and the share of personal income tax 
entering the city budget was lowered to 50% from 75%, we still think operating 
surpluses will exceed 5% of operating revenues in the medium term. This will 
likely be supported by state operating support and the management's adherence 
to cautious spending policies, as was the case in 2011. Moreover, 
notwithstanding strong pressure on the central budget, the central government 
has demonstrated willingness and ability to support Dnipropetrovsk's vital 
infrastructure projects, such as the construction of motorways, a new bridge, 
and a subway system. These projects will result in consistently high capital 
spending, but will translate into only modest (over 5% of revenues) deficits 
after capital accounts, in our view.

Despite existing and proposed borrowings, Dnipropetrovsk's tax-supported debt 
will not likely exceed 30% of consolidated operating revenues by 2014, in our 
view. The city's debt burden will consist of minor direct obligations (a small 
bank loan and a proposed bond) and the commercial debt of the municipal 
companies, which is partly guaranteed by the budget. Due to stronger capital 
support from the central government, Dnipropetrovsk's borrowing plans will 
remain constrained. 

In late 2011, the central government guaranteed the long-term loan to the 
city's metro company from the European Bank for Reconstruction and Development 
(EBRD; AAA/Stable/A-1+) for EUR152 million. Contrary to our previous 
expectations, Dnipropetrovsk did not have to coguarantee the loan and is 
responsible only for interest payments. We therefore do not include the EBRD 
loan in the city's tax-supported debt.

Dnipropetrovsk's wealth levels are somewhat above the Ukrainian average, but 
the city's economy is concentrated on the steel and machine-building 
industries. After a crisis-driven drop, the city benefited from a rapid 
recovery of output and investment in 2010-2011. We expect growth to continue, 
albeit at a slower pace in 2012-2013.

Dnipropetrovsk's liquidity position is "neutral" according to our criteria. 
Average cash on accounts will comfortably exceed the expected debt service in 
the next 12 months, which consists of interest payments on a bank loan and a 
minor midterm treasury loan. As of July 1, 2012, free cash in the city's 
accounts stood at Ukrainian hryvnia 144 million ($18 million). 

However, according to our methodology, we adjust our assessment of the city's 
liquidity position by its "uncertain" access to external liquidity. This is 
due to what we regard as the undeveloped domestic capital markets and weak 
banking systemic in Ukraine (see "Banking Industry Country Risk Assessment: 
Ukraine", published May 15, 2012, on RatingsDirect on the Global Credit 

For operating-cash shortages, Dnipropetrovsk has access to 60-day state 
treasury loans, as other Ukrainian cities do. Yet Ukraine's treasury might 
face technical difficulties when under stress, as was the case in early 2010, 
when it experienced difficulties processing payments. 

Recovery analysis
We rate Dnipropetrovsk's UAH100 million bond due in 2015 at 'B/uaA-'. The 
recovery rating on this bond is '4', indicating our expectation of "average" 
(30%-50%) recovery in the event of a payment default. 

The recovery rating factors in the city's very weak financial flexibility, 
lack of large assets available for sale, spending pressures, and only average 
priority of debt service against other expenditures. Very limited support from 
the sovereign under a systemic default scenario also pressures the recovery 
rating. The recovery rating is supported by Dnipropetrovsk's only modest debt 
and debt service over the next few years.

The stable outlook reflects our expectation, according to our base-case 
scenario, that despite a possible slowdown in economic growth and tax 
revenues, Dnipropetrovsk's adherence to cautious expenditure policies, coupled 
with continued central-government support, will likely result in operating 
surpluses above 5% and only modest deficits after capital accounts over the 
medium term. It also reflects the city's low tax-supported debt and debt 
service in 2012-2014.

We would likely take negative rating actions on Dnipropetrovsk if operating 
expenditures, weaker revenues, or the municipal companies' financial positions 
put additional stress on the city's operating performance, resulting in 
sustained operating deficits and a weaker liquidity position. The 
deterioration of the city's liquidity resulting from short-tem debt 
accumulation could also put pressure on the rating. 

We could take positive rating actions if the city displayed stronger budgetary 
performance in line with our up-side scenario, in particular when combined 
with a clear and structural reduction of the payables of the city's GREs. In 
the longer run, positive rating actions will likely depend on the city 
formally adopting debt and liquidity policies, coupled with improvements in 
Ukraine's institutional framework. Ratings upside would also depend on our 
rating actions on Ukraine.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010
     -- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. 
Local And Regional Governments And Related Entities And For Rating Their 
Commercial Paper Programs, Sept. 15, 2009
Ratings List
Ratings Affirmed

City of Dnipropetrovsk
 Issuer Credit Rating                   B/Stable/--
 Ukraine National Scale Rating          uaA-
 Senior Unsecured                       B
 Senior Unsecured                       uaA-
   Recovery Rating                      4

 Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 

Our Standards:The Thomson Reuters Trust Principles.
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