Fitch Ratings has revised the City of Katowice’s outlook to stable from positive and affirmed the City’s long-term foreign and local currency ratings at „A-”. Fitch has also affirmed the City’s national long-term rating at „AA+(pol)” with a stable outlook.
Key rating drivers
The rating action follows the revision of the Outlook on Poland’s long-term foreign and local currency Issuer Default Ratings (IDRs) to stable from positive. The outlook also reflects Fitch’s expectations that the City’s debt service ratio will remain healthy, despite the projected gradual weakening of the City’s operating results.
The rating actions reflect the application of Fitch’s “International Local and Regional Governments Rating Criteria” dated 9 April 2013, according to which subnationals’ ratings cannot be higher than the sovereign.
The affirmation reflects Katowice’s continued good operating performance, albeit weaker than in previous years, high liquidity buffer, which supports debt servicing, wealthy economy and tax base. The ratings also take into account the projected moderate growth of the City’s direct and indirect debt in 2013-2015.
Fitch expects the City’s operating performance to continue its weakening trend in 2013-2015, although it should remain above the Katowice’s rating peers and provide strong debt coverage. In 2013 the operating margin could total 10% of operating revenue (11.6% in 2012), falling to about 9% in 2014-2015. This would correspond on average to PLN 140 million of projected operating balance, which should 2,5x cover debt service (including debt repayments and interests).
In Fitch’s view, opex growth will continue to exceed operating revenue growth. This will result from the City’s policy, which is aimed at providing a high level of services to the Katowice’s inhabitants and investors, simultaneously facing weaker economic growth prospects.
The City’s liquidity buffer will be partially absorbed by capex in 2013-2015, but should remain good, about PLN 200 million (PLN 400 million in 2012), well covering the City’s annual debt service, which is projected at about PLN 55 million annually.
Following investments Katowice’s debt may rise to PLN 700 million at end-2014 from PLN 485 million at end-2012, accounting for a moderate 45% of current revenue (36% in 2012). The City has already secured all debt financing needs for its 2013-2014 investments, having PLN 233 million available under the contracted long-term loans. The direct debt to current balance ratio should remain healthy, at about six years (three years in 2012), well below the City’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.
Negative rating action could result from significant deterioration of the City’s debt coverage far below Fitch’s expectations due to a sustained deterioration in the operating margin, and/or significant rise of city’s net direct risk.