Fitch Ratings has affirmed the City of Katowice’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘A-‘. Fitch has also affirmed the City’s national long-term rating at ‘AA+(pol)’. The outlooks are stable.
The affirmation reflects Fitch’s expectation that Katowice will maintain its sound operating performance, despite a weaker 2013, given the City’s still high flexibility on revenue and spending. The ratings also factor in an expected decrease in direct debt from 2015 as Katowice aims to finance its investments mainly from its own sources. This self-financing will partially absorb the City’s significant cash reserves although the liquidity buffer should remain more than sufficient to ensure smooth debt service.
Fitch expects the city to increase its operating balance close to PLN 190 million or 12% of operating revenue by 2017, from PLN 147 million in 2013, as part of the Katowice’s focus to improve operating performance over the medium term. In 2013 the operating margin fell to 10,7% as expected by Fitch and was the lowest level since 2009. Nevertheless, the operating balance of PLN 147 million was sufficient to cover debt service (including debt repayments and interest) by 5x.
In Fitch’s view, operating revenue growth will only slightly exceed opex growth in 2014-2017. This is because despite the City’s flexibility on revenue and expenditure, Katowice refrains from significantly raising local taxes and fees in order to support local business and the cost of living. Revenue growth, however, is supported by the wealthy economy, a growing tax base and Fitch’s expectations of faster economic expansion in Poland over the medium term. On expenditure we expect the city to make the same savings as it did in the previous year at 5% of operating expenditure.
Fitch expects Katowice’s capex to peak at PLN 540 million or 30% of total expenditure in 2014, with the completion of major infrastructural investments, before declining to average PLN 330 million annually (20% of total expenditure) in 2015-2017. Fitch projects that capital revenue (mainly EU grants) and the current balance will finance on average 60% of capex. The remainder will be funded with the Katowice’s high cash reserves and debt (only 2014-2015).
The City’s cash reserves of PLN 390 million at end-2013 will be partially absorbed by capex, but should not fall below PLN150m by 2017. This should still enable Katowice to comfortably cover annual debt service, projected by Fitch at PLN 35 million on average. Due to the City’s high cash levels, its net direct debt was only PLN 210 million at end-2013 or 15% of current revenue. Cash on deposits generated higher interest than interest paid on its debt in 2013.
As a result of capex funding Katowice’s direct debt may rise to PLN 670 million by end-2014 or a moderate 47% of current revenue, from PLN 600 million (43%) at end-2013. The City has already secured all its debt-financing needs for its 2014-2015 investments, with PLN 105 million available under the contracted long-term loans with European Investment Bank and Council of Europe Development Bank. From 2015 debt is likely to decline to 42% of current revenue by 2017, as the City implements its policy to limit new debt.
Sustainable sound operating performance and declining pressure to fund capex with debt could lead to a positive rating action.
Conversely sharper deterioration in the Katowice’s debt coverage than expected by Fitch, due to a sustained weakening in the operating margin or a significant rise in the City’s net direct risk, could result in a negative rating action.
source: Fitch Ratings