OREANDA-NEWS. This announcement corrects the one published on 15 July, which was an incorrect version.

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 affirmed Szczecin's National Long-Term rating at 'AA-(pol)' with Stable Outlook and National Short-Term rating at 'F2(pol)'.

The affirmation reflects Fitch's base case scenario that Szczecin will continue to post its good operating performance in the medium term supported by sophisticated management practices relating to both strategic and financial management. The ratings also reflect healthy debt ratios, moderate debt levels and a high liquidity buffer.

KEY RATING DRIVERS

Fitch expect that in the medium term the city will continue to post a good operating performance, with an operating margin of 12%-13% annually and expected operating balance 2x higher than annual debt service (instalments with interests). Fitch expects direct debt to remain moderate at 55%-60% of current revenue in the medium term. The city's debt-to-current balance ratio should remain satisfactory at around six years (2015: 3.5 years) well below the final debt maturity of 25 years.

In 2015 Szczecin posted a sound operating performance with an operating margin of 17% and operating balance of PLN320m, which was 7x higher than annual debt service. The operating performance was supported by high growth of revenue from income taxes (by 10%) and property tax (by 3%) and by over PLN80m of VAT refund. For comparison, when excluding the VAT refund, the operating margin would be 13.4% and operating balance 5x higher than annual debt obligations.

In 2015 city's direct debt grew to PLN1.065m from PLN913m in 2014 following the PLN700m peak of investment resulting from final payments for EU co-financed investments. Fitch assumes that Szczecin will continue its investment-driven approach in medium term and similar to previous years, will apply for EU funds to co-finance its capex. We expect capital expenditure at around PLN450m annually on average (20% of total expenditure), being around 50% financed from capital revenue as the rest of capex financing may come from new debt and city's own sources.

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 social care and administration. We also view positively 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.

Szczecin is a large city in the national context with around 407,000 inhabitants, making it the seventh-largest Polish city. GRP per capita in Szczecin was 117% of the national average in 2013. Szczecin's economy is diversified, with services playing an important role. The local economy has benefited from improvements in local infrastructure. This stimulates business activity within the city and provides it with higher tax revenue. The unemployment rate in May 2016 was 6.0%, significantly below the national average of 9.1%.

In 2016, the National Parliament introduced the '500+ programme', a cash benefit of PLN500 per month per child for families with more than one child. This will be a new central delegated task. The central government will provide transfers that will go through the local government's (LG) budget This programme will be neutral for the city's operating balance because it will influence both revenue and expenditure but will inflate operating margin and debt/current revenue ratio from 2016. Fitch already included this in its base case scenario for 2016-2018

The regulatory regime for Polish LGs is relatively stable. Their activities and financial statements are closely monitored and reviewed by the central administration. There is good disclosure in the LGs' accounts. The main revenue sources, such as income tax revenue, transfers and subsidies from the central government are centrally distributed according to a legally defined formula, which limits the central government's scope for discretion. Additionally, local tax rates such as real estate tax, which some LGs are entitled to collect, are capped by the state. This makes LGs somewhat reliant on decisions made by the central government and limits their revenue-raising flexibility.

RATING SENSITIVITIES

Szczecin's ratings could be upgraded if the city strengthens its operating performance accompanied by stabilising direct debt leading to debt payback below five years at sustainable base.

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.