OREANDA-NEWS. Fitch Ratings has upgraded the Polish City of Rybnik's National Long-Term rating to 'AA-(pol)' from 'A+(pol)'. The Outlook is Stable.

The upgrade reflects the maintained sound operating performance, the decline in direct debt to the lowest level for 10 years, sound debt service ratios and the city's very good liquidity.

The Stable Outlook reflects our expectation that the city will maintain sound operating performance in the medium term with an operating balance significantly exceeding debt service. Additionally, although we project an increase in direct debt to finance new investments from 2017, this should not materially affect the debt payback ratio.

KEY RATING DRIVERS

We expect Rybnik to maintain operating margins of about 10%-11% in 2016-2019, according to our base case scenario. It includes the central government "Family 500+" programme launched in April 2016. Although the flow of funds from the central government, inflating both sides of the budgets, will be neutral for the operating balance, the ratio comparison for operating and current margins, as well as debt to current revenue between 2016 and 2015 will be limited.

We assume that due to the prudent financial management and the continued efficient opex control, the city will be able to mitigate the ongoing pressure on opex. Rybnik has a track record of good operating performance. In 2015, like in 2014, Rybnik reported a very high operating margin of 14.0% (2014: 15.4%) but deducting one-off revenues of PLN9.3m (eg. VAT, cost refund) the margin would be 12.7%, ie in line with the margin achieved on average in 2010-2015 (excluding one-offs).

For 2016-2019 we expect the city may spend a total PLN600m or 18% of total expenditure on average for capex. This will be comparable with the city's capex in 2011-2015 (17% of total expenditure on average). The investments will be financed mainly from Rybnik's own sources (current balance and cash surpluses) and EU grants and the remainder with debt. The main investment may be the construction of the regional expressway crossing Rybnik (costing about PLN434m), which will determine the city's investment programme in 2016-2020.

Direct debt should remain below low 20% of current revenue in 2016-2019, despite the projected debt growth. We expect Rybnik's debt to grow to about PLN80m-PLN90m by 2019 from PLN40.2m at end-2015, which is the lowest debt level for the last 10 years. The city aims to incur a smoothly amortising and long-term loan with an international financial institution, which would lower the pressure on debt service for the city's budget.

Rybnik's debt service will amount to about PLN25m annually in 2016-2017 (about 30% of the operating balance) and decline to about PLN15m in 2018-2019 (about 20%). This will mainly result from the bond redemption, which accounted for 71% of the debt stock at end-2015 and that amortises by PLN14m in 2016 and PLN14.5m in 2017. We project a strong operating balance, which will cover debt service by more than 3x. Expected sound liquidity will mitigate the risk of high debt redemption.

We expect Rybnik's liquidity to remain sound in 2016-2019. The cash reserves at end-2015 were PLN99m and rose to about PLN123m at end-March 2016, covering by over 4x the debt service of PLN20.8m and by over 2x the debt stock in 2015. The high cash balance and the low indirect risk comprising the guarantee issued in favour of one of Rybnik's companies resulted in negative net overall risk for the second year in a row.

RATING SENSITIVITIES

The rating could be upgraded if the city strengthens its operating performance on a sustained basis, with an operating margin above 14% and containment of direct risk at less than 10% of current revenue.

A downgrade could result from sustained deterioration of operating performance with operating margin below 10% and a significant rise in debt resulting in weak debt payback of more than six years.

KEY ASSUMPTIONS

Fitch assumes the construction of the regional expressway crossing Rybnik (connecting Raciborz with Pszczyna) will be confirmed subject to the receipt of EU grants of up to PLN300m.