Fitch Affirms City of Szczecin at BBB+. Outlook Stable

Fitch Affirms City of Szczecin at BBB+. Outlook Stable

Fitch Ratings has affirmed the Polish City of Szczecin's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and Short-term foreign currency IDR at 'F2'.

KEY RATING DRIVERS

The affirmation reflects Szczecin’s operating performance, which is in line with Fitch’s expectations. This can be attributed to prudent financial management and on-going opex monitoring, which leads to robust self-funding capacity and sound debt ratios. The ratings factor in high liquidity and stable debt in 2014-2015. They also take into account increasing contingent liabilities and persisting pressure on opex from the challenging legal framework. Fitch expects the city to maintain its operating balance at about 9%-10% of operating revenue in 2014-2015 (2013: 9.6% according to Fitch's estimate), which will allow Szczecin to cover its annual debt service obligations of PLN60m by about 2x-3x on average. This will be derived from Szczecin’s financial flexibility and the city authorities’ effective policy to limit opex growth, coupled with increasing revenue from local taxes and fees, supported by the expansion of the city’s tax base.

Fitch forecasts Szczecin’s direct debt will remain moderate in 2014-2015, accounting for about 60% of current revenue (2013: PLN935m; 58%), as the majority of the city’s medium-term debt financing needs were met in 2012. Fitch estimates that the city’s capex in 2014-2015 will average PLN450m p.a. (ie, 22% of total spending). Over 60% could be financed from capital revenue, as the city has managed to secure EU grants for its major investments. Fitch projects the city’s debt service and debt coverage ratios will remain healthy in 2014-2015. The debt to current balance ratio may increase to about eight years, which is well below the average debt maturity. The city is exposed to interest rate and FX risks, as almost all of Szczecin’s debt is floating rate (80%) and 46% is euro-denominated. However, both of these risks are mitigated by Szczecin’s prudent budgetary approach, under which for many years the city has been budgeting higher amounts for interest payments on debt than the actual amount paid.

The city’s contingent liabilities stemming from municipal companies’ debt could increase to PLN900m in 2015 from PLN581m at end-2012. Fitch believes that indirect risk for the city’s budget is alleviated as more than 70% of investments are implemented by self-supporting companies financing their activity from tariffs paid by end-users. Szczecin’s contribution will be restricted to capital injections, which should be low in relation to the city’s budget size.

RATING SENSITIVITIES

A downgrade could result from a deterioration in operating performance to an operating margin below 7%, accompanied by debt rising well above Fitch’s projections, resulting in significant deterioration in the debt coverage ratio beyond 15 years. Conversely, Szczecin’s rating could be upgraded if the city sustainably strengthened its operating performance, with its operating margin above 12%, accompanied by stabilisation of direct debt following containment of capex in the medium term.

Fitch Ratings- Warsaw/London - 17 January 2014.