Fitch Ratings has affirmed the city of Katowice’s long-term foreign and local currency Issuer Default Ratings (IDR) at “A-” for the second time this year. The outlook is stable.
The affirmation reflects Katowice’s sound operating performance, which is expected to be maintained in the medium term.
The ratings also factor in agency’s expectations that Katowice’s direct debt will be stable, based on the city’s policy of financing investments mainly with its own resources. Although this leads to the absorption of the city’s significant cash reserves, Katowice generates operating balances that provide the city with more than sufficient liquidity to ensure smooth debt service.
Fitch expects in its unchanged base case scenario that Katowice’s operating performance will remain solid, due to prudent budgeting and continuing rationalization in operating spending. The analysts forecast operating margin to be stable at 13% in 2015-2017. Projected operating balances averaging PLN 200 million annually in 2015-2017, which compare with the average balance of PLN 172 million in 2010-2014, should be sufficient to cover 5x the city’s debt servicing (including debt repayments and interest).
For 2015-2017 Fitch forecasts Katowice to spend on average PLN 350 million annually, or about 20% of total expenditure, similar to 2010-2013. The city will spend capex mainly on roads and public transport, on environmental protection and sport facilities. Pressure to raise debt should be low as the city aims to finance investments entirely from capital revenue (mainly EU capital grants), cash reserves and from the current balance in 2015-2017. In 2014, capex peaked at PLN 584 million or 31% of total expenditure, due to the completion of major infrastructure investments.
Katowice’s direct debt is likely to stabilize at 45% of current revenue in 2015-2017 and total PLN 660 million by 2017 (2014: PLN 674 million and 46% of current revenue), according to agency’s projections. Fitch assumes that the city will complete all remaining large investments in 2015 for which it has already secured financing. The debt-to-current-balance ratio (debt payback ratio) should remain healthy at a moderate 3,5 years, well below the city’s debt maturity of 20 years.
It is expected that the city’s liquidity to remain satisfactory in the medium term, although Katowice will continue to use its cash reserves to finance investments. In 2014, PLN 150 million of cash reserves were absorbed by capex. Fitch projects cash reserves to decline to about PLN 80 million by 2017, from PLN 223,3 million at end-2014, but should still cover annual debt service by 2x.
Katowice’s ratings could be upgraded if the city improves its operating performance with an operating balance of above 15% of operating revenue on a sustained basis and if it maintains a debt payback ratio of below three years (2014: 3,7 years).
Conversely, 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 a negative rating action.
Fitch expects the city to continue its efficient operating expenditure control and to manage the budget prudently in the medium term.
Fitch assumes that the city will continue to receive EU funds to co-finance its investment programme.