Fitch Ratings has affirmed the 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 analysts’ unchanged view of the city’s strong capacity for self-financing investments and sound liquidity, which Fitch expects to be maintained over the medium term. Also the agency expects the direct debt to grow to finance investments, which will not negatively affect the safe debt service and debt payback ratios. In addition, the ratings are supported by the city’s wealthy and service-oriented local economy.
Katowice has a strong capacity for self-financing investments, according to Fitch. For 2017-2020 the agency forecasts the city will spend close to PLN 1,7 billion on capex, ie about 20% of total expenditure annually on average. Analysts expect the highest capital spending in 2018-2019. Around 60% of capex will be on roads and on public transport, and the remainder on sport, culture and thermo-insulation of municipal buildings. About 40% of investment financing will come from the city’s current balance and about 40% from capital revenue. The rest will be covered by new debt and accumulated high cash.
In 2016, capital expenditure was PLN 146 million (a low 9% of total expenditure), well below the original plan, mainly due to the delay in availability of EU grants under the 2014-2020 budget. The investments will be postponed to the following years and the achieved budgetary surplus at end-2016 has further increased the cash available for investment finance.
The city has a track record of strong liquidity, with cash balances averaging PLN 330 million in the last five years. The cash balances exceeded the annual debt service by 11x on average in 2012-2016, which is a strong rating factor. The sound liquidity will be maintained despite the expected partial cash absorption for investment finance as management’s policy is to keep a high cash balance to have headroom for unforeseen developments rather than spend it. The expected sound liquidity will mitigate the risk of higher redemption as Katowice’s debt service will double to about PLN 70 million annually in 2019-2020 when European Investment Bank (EIB) loans totalling PLN 400 million start to be redeemed.
Fitch base case scenario expects Katowice’s operating performance to remain satisfactory for the rating, fuelled by growing income and local tax revenue due to expected national economic growth of at least 3% per year in the medium term. Agency forecasts the operating balance to average PLN 200 million annually, or about 11% of operating revenue in 2017-2020, excluding some non-recurring operating revenue. Operating balances of this level may cover principal and interest payments more than three times despite the expected growth in debt service, Fitch reported. Management will keep its goal of maintaining operating balances at this level, which implies to curb the operating expenditure growth. However, it may be difficult in the election year 2018.
In 2016, Katowice reported an operating balance of PLN 236 million or 14% of operating revenue, which was high also due to the one-off civil activities tax revenue of PLN 54 million. For 2017 the city also expects PLN 27 million of extraordinary civil activities tax revenue and Firch projects the operating balance could be about PLN 220 million or 13% of operating revenue. Due to extraordinary revenues, the operating balance increased above the PLN 200 million benchmark from 2015 and was higher than the average PLN 168 million achieved in 2011-2014.
To finance the planned investments Katowice has secured financing through a loan from the EIB, which will have a smoothly amortising and long-term repayment schedule, lowering the pressure on debt service for the city’s budget. Katowice’s debt will peak at around PLN 820 million by 2020, from PLN 654 million at end-2016. Direct debt should remain moderate relative to current revenues and not exceed 45% in 2020 (2016: 39%). Analysts project the debt payback ratio (direct-debt-to-current-balance) to stay healthy at around four years (2016: 2,8 years), despite the projected debt growth.
The city is the center of a large Katowice conurbation, with 2 million inhabitants out of 4,6 million in the whole Silesian region. The city’s economy is well-diversified and service-orientated with 67,8% of gross value added from this sector in 2014 (national average: 62,8%). GDP per capita in the Katowice sub-region is relatively stable, accounting for 137% of the national average in 2014. The foundation of a metropolis from mid-2017, consisting of 41 municipalities with Katowice as the center, should have a low financial impact on the expenditure side of the city’s budget in the medium term. The metropolis bears opportunities for joint investments and streamlined municipal services (eg public transportation) thus Fitch expects it to have a positive impact on Katowice’s local economy and budget.
The ratings could be upgraded if Katowice improves its operating performance with an operating margin of about 15% on a sustained basis and maintains a debt payback ratio of below three years, providing the sovereign ratings are also upgraded.
Conversely, a sharper than expected deterioration in the city’s debt payback ratio to above eight years, due to a sustained weakening in the operating margin or a significant rise in the city’s direct debt to above 70% of current revenue, could result in negative rating action. Additionally, a downgrade of the sovereign rating would lead to a downgrade.