Fitch affirms Katowice at A-, outlook stable

Fitch Ratings has affirmed the Katowice’s long-term foreign and local currency ratings at “A-“ and assigned a national long-term rating of “AA+(pol)”. All ratings have stable outlooks.

The affirmation and “AA+(pol)” national rating reflects Katowice’s continued good, albeit declining operating performance, high liquidity buffer, which supports debt servicing, a wealthy economy and tax base. The ratings also take into account projected moderate growth of the City’s direct and indirect debt in 2012-2014.

The stable outlook reflects Fitch’s expectations that Katowice will maintain good operating performance in the medium term, despite persistent pressure on operating spending. This will ensure healthy debt servicing.

Continued good operating performance, with declining pressure on debt-funded capex could trigger a positive rating action. However, the City’s long-term foreign currency rating is constrained by the sovereign rating. Conversely, a negative rating action could result if the City’s debt coverage exceeds six years resulting from a sustained deterioration in the operating margin, far below Fitch’s expectations and/or significant rise of Katowice’s net direct risk.

Fitch notes a declining trend in Katowice operating performance since 2007, although it is still better than the majority of Polish cities. In 2011, the operating balance was PLN 185 million, or 14,4% of operating revenue, and covered debt service 10x. Fitch expects the City to maintain the operating margin above 13% of operating revenue in the medium term. This would correspond on average to about PLN 186 million of operating balance, which should comfortably cover (by 4x-5x) growing debt service following the expected growth in debt.

Katowice’s liquidity has historically been sound, with average cash at the City’s account well over PLN 450 million in 2010-2011, which resulted in a negative net debt position for the City. In Fitch’s view, Katowice’s liquidity buffer should be partially absorbed by capex in 2012-2014, but it will still remain high.

Fitch forecasts that due to investments Katowice’s debt may grow to PLN 700 million by 2014 from PLN 376 million at end-2011, but it should not exceed moderate for international standards 50% of current revenue. The city has already secured all the debt financing necessary for its 2012-2014 investments, contracting long-term loans from the European Investment Bank and from the Council of Europe Development Bank.

Fitch Ratings is a global rating agency committed to providing the world’s credit markets with independent and prospective credit opinions, research, and data. Fitch Ratings is widely recognized by investors, issuers, and bankers for its credible, transparent, and timely coverage.

source: Fitch Poland