No changes in Katowice rating by Fitch

Fitch Ratings has affirmed the City of Katowice’s long-term foreign and local currency Issuer Default Ratings (IDR) at „A-”. Fitch has also affirmed the city’s national long-term rating at „AA+(pol)”. The outlooks are stable.

The affirmation reflects Katowice’s sound operating performance, which the agency expects to be maintained in the medium term. The ratings also factor in their expectations that the City’s direct debt will be stable, based on its policy of financing investments mainly with own resources. Although this leads to the absorption of the City’s significant cash reserves, Katowice has more than sufficient liquidity to ensure smooth debt service.

Fitch expects that the City will continue its positive performance of 2014 over the next two years, with an operating margin of 13%. Based on preliminary data the City reported a better-than-expected operating margin of 13,1% in 2014, due to current spending savings on statutory responsibilities. Katowice expects to have achieved an operating balance of PLN184,1 in 2014, up from PLN 147 million in 2013. The operating balance would have been sufficient to cover debt service of PLN 29,9 million (including debt repayments and interest) by 6x. The analysts assume that the City will maintain its policy of limiting opex growth and project an operating balance of PLN 200 million by 2017.

Fitch expects that Katowice’s direct debt to remain moderate and stabilize at below 50% of current revenue in 2015-2017. At end-2014 debt amounted to PLN 674,2 million or 46% of current revenue (preliminary estimates). The majority of loans are with European Investment Bank (87%) and with European Investment Bank and Council of Europe Development Bank (12%). Katowice’s debt is long-term and amortizes smoothly, lowering pressure on the City’s budget. The debt payback ratio (debt to current balance) was 3,7 years at end-2014 and was significantly lower than the weighted average debt maturity of over 18 years, which is a rating-positive.

The agency expects the City’s capex to average to PLN 350 million annually or 20% of total expenditure for 2015-2017. As the City aims to finance the investments from own sources mainly we expect that 60% of capex will be funded by capital revenue (mainly EU grants) and the City’s current balance. The remainder will be funded by the City’s high cash reserves and debt (PLN 17 million in 2015).

Fitch assumes that Katowice will continue to use its cash reserves to finance investments. In 2014 PLN 150 million of cash reserves were absorbed by capex. The analysts project cash reserves to decline to about PLN 80 million at end-2017, from PLN 223,3 million in 2014, but should still cover annual debt service, by 2x.