Fitch affirmed Katowice at A-

Fitch Ratings has affirmed the Polish 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 Katowice’s continued good operating performance, albeit weaker than in previous years, but still in line with Fitch’s expectations and the ratings. The ratings take into account Katowice’s high liquidity buffer, which supports debt servicing, and its wealthy economy and tax base. The ratings also factor in the City’s projected moderate direct and indirect debt in 2014-2015. Fitch expects the Katowice’s operating performance to continue its weakening trend in 2014-2015, although it should remain above the city’s rating peers and provide strong debt coverage.

Fitch estimates the City’s operating margin in this period will hover around 9%-10% (2013: 10,7% according to the City’s estimate). This would correspond on average to PLN 140 million of projected operating balance, which should 2,5x cover debt service (including debt repayment and interest).

In Fitch’s view, opex growth will continue to exceed operating revenue growth. This will result from the Katowice’s policy, which aims at providing a high level of services to the City’s inhabitants and investment providers.

The City’s liquidity buffer will be partially absorbed by capex in 2014-2015, but should remain strong, about PLN 200 million (PLN 390 million in 2013), covering the City’s annual debt service, which is projected at about PLN 50 million on average.

Following investments, Katowice’s debt could peak at about PLN 700 million at end-2014 (end-2013: PLN 600 million), but will still account for a moderate 45% of current revenue (43% in 2013). The city has already secured all its debt financing needs for 2014-2015 investments, with PLN 105 million available under the contracted long-term loans. The direct debt to current balance ratio should remain healthy, at about six years (four years in 2013), which will be well below the Katowice’s average debt maturity (of about 19 years).

An upgrade of the sovereign rating, accompanied by the continued good operating performance, with reducing pressure on debt-funded capex, could trigger positive rating action.

A downgrade could result from a significant deterioration of the City’s debt coverage above nine years due to a sustained deterioration in the operating margin or a significant rise in the Katowice’s net direct risk.

text source: Fitch Ratings