OREANDA-NEWS. Fitch Ratings has assigned the Metropolitan Municipality of Antalya a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB+', Short-Term Foreign Currency IDR of 'B', Long-term Local Currency IDR of 'BBB-', Short-Term Local Currency IDR of 'F3' and National Long-Term Rating of 'AA+(tur)'. The Outlooks are Stable.

The 'BBB-' Local Currency IDR reflects Antalya's strong recovery of budgetary performance supported by a fairly strong above national average local economy and tax base that has been boosted by Law 6360. This is coupled with expenditure discipline that has led to an improvement of the operating balance, which increased the city's debt servicing capacity and resulted in debt metrics in line with median 'BBB-' international peers. The 'BB+' Long-Term Foreign Currency IDR reflects the city's high share of euro-denominated debt, exposing the city to significant FX risk in times of market volatility. It also reflects the city's dependency on the Treasury repayment guarantee when borrowing in the external markets.

KEY RATING DRIVERS

The ratings reflect the following key rating drivers and their relative weights:

HIGH

Budgetary Performance Strong

Fitch expects operating margins to remain strong in 30% intervals in 2016-2018, due to its wealth levels that are approximately 10% above the national average and increased shared tax revenue base under Law 6360 (Turkish metropolitan municipalities' shared tax revenue base from the national tax pool increased by 1% to 6% as of March 2014).

Fitch also takes into account the expected increase of opex on average by 2% above operating revenue in 2016-2018, due to the administration's new responsibilities related to the enlargement of Antalya's boundaries to the province boundaries as per Law 6360. However, the agency expects the city to continue consolidation in the medium term.

In 2014 the newly elected mayor and the management team applied cost-cutting measures especially to the purchase of goods and services by creating a more competitive environment that led to lower purchase prices from 2014. This led to a decline in operating expenditure by 12.6% in 2015, even though it was an election year and the city had to realise additional infrastructure investments as a consequence of Antalya's new boundaries as per Law 6360, similar to other Turkish metropolitan municipalities from 2014 (except for Istanbul and Izmit)

Law 6360 boosted Antalya's shared tax revenue base. Consequently, Antalya posted a strong operating margin of 37.9% in 2015 (4Y average: 7%), which was supported by operating expenditure growth of 12.6%, substantially below operating revenue at 33% yoy in nominal terms. The weak operating performance in 2011-2014 was caused by the increase in opex. This was due to an unbalanced cash flow from the past, corresponding to low payment performance, which forced the increase of goods and services.

Moderate Debt Levels, Persistent FX Risk

Fitch projects the improved operating revenue will help reduce Antalya's overall risk on a sustainable basis below 100% of current revenue in the medium term. Fitch expects the city to remain committed to reducing its unhedged FX exposure by reducing the overall stock of foreign exchange debt.

We expect debt to current revenue to remain on average below 50% in 2016-2018. In 2015, the city's debt to current revenue declined to a low of 45.3% from a high of 131% in 2011.

Antalya's debt is related to its capital intensive infrastructure responsibilities mirroring other Turkish metropolitan municipalities. In 2009 the city borrowed in foreign and domestic currency for the construction of its light rail system with a total distance of 11km in the external markets, as the terms and conditions are better than in the domestic markets.

The lenders of Antalya's FX debt portfolio consist solely of multilateral agencies, such as European Investment Bank (EIB), Instituto de Credito Oficial (ICO) and French Development Agency (ADF). The loan from EIB has a Treasury repayment guarantee, whereas ICO and ADF debt has a Treasury on lent agreement. The total amount of the city's foreign debt, which is euro-denominated, was equivalent to TRY302.8m at end-2015, or 73% of its total debt, which exposes the city to significant FX risk. However, the lengthy maturity of its total debt stock with a weighted average maturity of 10 years, its amortising structure as well as Treasury repayment guarantee act as mitigating factors.

For local currency borrowing, the city has also good access to various commercial and state owned banks. Antalya has posted a positive funding balance since 2014.

Antalya's contingent liabilities consist of the debt of one public sector entity and five municipality-owned companies, four of which are majority owned and the fifth is owned indirectly through its waste water and distribution management, ASAT. ASAT is the most indebted establishment, as it is mostly involved in the capital intensive infrastructure projects for the metropolitan area besides the public transportation investments, which were undertaken by Antalya. ASAT's debt was TRY796.5m in 2015, almost over 90% of Antalya's current revenue.

However, ASAT is self-funding and posted a profit of TRY194m in 2015. 38% of its debt is in euros lent through a syndicated loan with Iller Bank and the World Bank, which has a Treasury repayment guarantee. The weighted average maturity of its total debt stock was 14.3 years and it has an amortising repayment structure, which mitigates immediate refinancing and liquidity risks.

Fitch considers the debt of the majority-owned companies as not significant, as they are mostly self - funding and their debt makes up less than 1% of Antalya's current revenue.

MEDIUM

Above Average Wealth Levels, but Concentrated

Antalya is Turkey's sixth-largest contributor to its GVA, dominating mostly in the services sector, contributing on average 4% in 2004-2011 (last available statistics). It is the fifth-largest city by population and accounts for 2.9% of the Turkish population, or 2.2 million people in 2015. The city is the main hub for the country's tourism, followed by agriculture. Around 30% of national tourist arrivals are hosted by the city.

The city attracts high migration due to its moderate climate and cultural and natural heritage and in comparison to other big cities, a lower inflation rate.

Management intends to diversify the local economic structure by establishing organised industrial hubs and hosting high scale international organisations such as the G20 Summit and EXPO 2016.

Strong Improvement of Finance Management

After the local elections in March 2014, the newly elected Mayor revamped the staff of the finance directorate.

The improved finance management was demonstrated through a budgetary surplus before debt variation for the first time since 2011, supported by expenditure discipline with a strong reduction in opex growth less than the operating revenue. The realised capex was 87% of the budgeted amount, mostly due to the implications of Law 6360 and election period. This is a higher rate for the metropolitan municipalities on average, but the administration posted an overall surplus without acquiring new debt in 2015.

The management generated additional financial revenues in 2015 through repo deals amounting to 1.2% of operating revenue, by taking advantage of the predictable cash flows of the Turkish metropolitan municipalities.

In 2015 total revenue realisation was 128.2% against total expenditure realisation of the budgeted amount at 102.1%.

The ratings also reflect the following key rating driver:

Weak Institutional Framework

Fitch views Antalya's credit profile as constrained by the evolving nature of Turkey's institutional framework for local governments (LGs). It has a short track record of stable development compared with many of its international peers. Unstable intergovernmental set-up leads to lower predictability of LGs' budgetary policies and hamper the city's forecasting ability.

RATING SENSITIVITIES

Sustainable reduction of the net overall risk, with debt to current revenue below 50% and FX share of debt below 50% and continuation of strong budgetary performance with operating expenditure not higher than budgeted would be positive for the Long-Term IDRs and National Rating.

A sharp increase in local and external debt and a deterioration of the deficit before debt variation to more than 15% of total revenues could prompt a downgrade, although this is not Fitch's base case scenario.