OREANDA-NEWS. Fitch Ratings has affirmed the City of Porto's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+'. The Outlooks are Stable. The Short-Term Foreign Currency IDR has been affirmed at 'B'.

The affirmation reflects no changes to Fitch's base case scenario of stable budgetary performance and declining debt. The Stable Outlook reflects that on Portugal (BB+/Stable).

KEY RATING DRIVERS

Rating Constraint

Porto's ratings remain constrained by the Portuguese sovereign, in accordance with Fitch's criteria. Porto's intrinsic credit profile is stronger than the ratings indicate, due to the city's healthy budgetary performance, low debt, as well as sound liquidity. Prudent management and Porto's role as service centre in north Portugal are also credit-positive.

As with other Portuguese cities, the accounts and budgets of Porto are overseen by the central government and its financial liabilities are approved by the National Court of Accounts. The limited role of the intermediate tiers of government (province and region) in Portugal strengthens the link between the central government and cities.

Solid Budgetary Performance

Porto has maintained high operating margins through cycles, at above 17% since 2009. Coupled with flexibility on capital expenditure, this has allowed the city to report a surplus before debt variation every year over the same period. The 2015 accounts confirmed the city's consistent performance with an expected operating margin exceeding 15%, as a result of stable, predictable revenues and expenditure restraint.

The 2016 budget is based on prudent operating revenue forecasts, and discipline in managing spending, with an intention to further reduce debt. It includes extraordinary financial revenues from concessions contracts, as well as high allocated EU capital transfers following the city's active application for such funds in 2015, aimed mostly at refurbishing projects. Porto's budget indicates a current balance of EUR25m, but the city has broadly outperformed its budgets since 2010 and Fitch expects a current margin close to 20% in 2016.

Decreasing Debt, No Contingent Risk

Porto reduced its outstanding debt to EUR80.1m in 2015, or 51.97% of current revenue, from EUR87.3m in 2014. We expect debt to decrease to close to EUR45m at end-2016 as the city will use extraordinary revenue from an expropriation settlement to redeem EUR28.7m debt ahead of schedule, in addition to budgeted debt repayment. The city started deleveraging in 2009, when debt peaked at EUR121.5m and as a key infrastructure development phase, including the enlargement of the metropolitan transport and the renewal of the airport, came to a close.

The administration expects no new debt in view of the city's adequate financial performance and liquidity, aside of the building refurbishing programme for which EUR0.9m has been allocated in the 2016 budget. Porto has no contingent liabilities and retains control over the public sector, which posted a surplus in 2015.

Prudent Management, Economy Recovering

Porto has a prudent financial policy and is constantly looking to improve its efficiency, having contained its operating expenditure after operating revenue fell 15.8% during the economic downturn over 2008-2013. Disclosure of information is satisfactory and precise, including the annual financial results of all public bodies within its scope. The current administration does not envisage further leverage except for projects of solid economic return, with a focus on real estate rehabilitation and infrastructure enhancement.

With an estimated population of 237,000 in 2014, the City of Porto is the second-largest cultural, administrative and economic Portuguese centre, providing services to a greater metropolitan area of 14 municipalities with 1.2 million inhabitants. GDP resumed growth in 2014, and is expected grow around 1.5%-2% over the next two years, driven by the healthy performance of the external and hospitality sectors.

RATING SENSITIVITIES

Porto's intrinsic credit profile is well above the sovereign's and could benefit from a continued decline in debt. However, Porto's IDR ratings are constrained by the sovereign IDRs and are therefore sensitive to changes of the sovereign rating