OREANDA-NEWS. Fitch Ratings has affirmed the Polish City of Szczecin's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and its Short-term foreign currency IDR at 'F2'. Fitch has also assigned Szczecin a National Long-Term rating of 'AA-(pol)' with Stable Outlook and National Short-term rating of 'F2'(pol).

The affirmation reflects Fitch's unchanged baseline scenario regarding Szczecin's good operating performance. The ratings also reflect the city's prudent financial management, rationalisation of operating spending, healthy debt ratios and moderate debt levels.

KEY RATING DRIVERS

Fitch expects the city to maintain its good operating performance in the medium term, with an operating margin of 11%-12% annually and operating balance covering debt service estimated by Fitch at PLN80m on average by 2.5x-3x. This is based on the assumption that the city's management will continue to control operating spending, and that revenue from local taxes and fees will continue to grow, supported by the expansion of the city's tax base and the growing economy.

Fitch expects that although direct debt will nominally increase, it should remain at a moderate level below 65% of current revenue in the medium term. The city's debt service and debt/current balance ratios should remain satisfactory in 2015-2017 at around seven years (2014: 4.1 years). Fitch assumes that Szczecin will continue its investment-driven approach and similar to previous years will apply for EU funds to co-finance its capex. The rest of capex financing may come from new debt.

Fitch expects city's capital expenditure to peak at PLN750m in 2015 and in medium term to be at PLN300m on average or around 15% of total expenditure. This will drive the city's direct debt, which may exceed PLN1bn at the end-2015. The city plans to incur about PLN180m of new debt to final payments for recently finished investments mainly EU co-financed in 2015.

Fitch considers the city's management practices a supportive rating factor. This includes maintenance of financial discipline and accumulation of funds for capex financing as well as efficient cost control in the educational sector, and in social care and administration. We also positively view the city's debt policy, which consists of incurring long-term low cost funding from international financial institutions, securing smooth debt repayments and a liquidity buffer to offset the FX and float interest rates risk.

RATING SENSITIVITIES

Szczecin's ratings could be upgraded if the city strengthens its operating performance on a sustained basis, with an operating margin above 12% accompanied by stabilising direct debt following containment of capex in the medium term.

A downgrade could result from a weakening of the city's operating margin to below 7%, accompanied by debt above 80% of current revenue, resulting in significant deterioration in the debt-to-current balance ratio to beyond 10 years.

KEY ASSUMPTIONS

Fitch assumes the investment programme will not be significantly extended leading to an increase in the city's demand for new debt.

Fitch also assumes that the city will comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU.

Fitch assumes that operating expenditure does not grow faster than operating revenue, leading to deterioration of operating margin.