OREANDA-NEWS. Fitch Ratings has affirmed the Polish City of Bialystok's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' and National Long-Term rating at 'A+(pol)'. The Outlooks are Stable.

The affirmation reflects Fitch's unchanged view of the city's high liquidity buffers and moderate debt level.

KEY RATING DRIVERS

The IDR reflects the city's strong self-financing capacity of investments, which is due to its high liquidity and efficiency in obtaining EU grants on is investments. It also reflects the city's moderate direct debt, which has been declining for the last three years, as well as still moderate indirect debt resulting from the partly EU and debt-financed investments of the municipal companies. The ratings further take into consideration the city's still satisfactory although slightly volatile operating performance.

Fitch expects Bialystok to demonstrate a satisfactory operating performance in 2016-2018, with an operating balance averaging about PLN80m, accounting for about 5%-6% of operating revenue, when excluding some non-recurring operating revenue.

In 2016 the city's operating results will be supported by one-off revenue from the compensation paid by the stadium contractor due to delays in completing the project. As a result, the city's operating balance may reach PLN100m in 2016, accounting for 7% of operating revenue (PLN71m in 2015).

Like all municipalities in Poland, Bialystok launched a central government "Family 500+" programme in April 2016. The flow of funds from the central government, inflating both sides of the budgets by about PLN90m in 2016, will be neutral for the operating balance. However, the ratio comparison for operating and current margins, as well as debt to current revenue between 2016 and 2015 will be limited.

Fitch projects that Bialystok's investment spending in 2016-2018 could total PLN1.1bn (on average 20% of annual total expenditure), as the city prepares to roll out investments under the 2014-2020 EU budget. Based on the good track record of acquiring EU grants under the 2007-2013 EU budget, Fitch assumes that the city will continue to receive high EU funds to co-finance its investment programme during 2016-2018. We expect over 70% of investment financing will come from the city's capital revenue and about 15% from the city's current balance. The remainder will be covered by available cash (in 2016) and new debt (from 2017).

The city's strong liquidity buffer remains a positive rating factor. During 2015, cash available on the city's accounts averaged about PLN180m and exceeded debt service by 3.1x. Fitch expects this high cash to be partially absorbed by debt service and capex in 2016, but it is likely to remain good, at about PLN50m, in the medium term.

Fitch projects the city's debt to further decline in 2016, like in 2014 and 2015. It could amount to about PLN600m at year end (end-2015: PLN643m), i. e. 42% of current revenue. The city's direct debt could return to a growth path from 2017, following new investments. However, in Fitch's view, in 2018 it will not exceed the peak 2013 level and will amount to about PLN750m, accounting for 50% of current revenue, a moderate level in comparison with peers.

In the medium term, we expect the debt-to-current balance ratio to remain satisfactory, at around 12 years, below the city's final debt maturity (up to 20 years). The city's debt service (including debt repayments and interests) could rise to about PLN100m annually in 2017-2018 from PLN80m in 2016 following higher debt repayments. Consequently, it may temporarily exceed the projected operating balance. High cash at the city's accounts should mitigate repayment risk.

We expect Bialystok's indirect risk to decline from 2016, after peaking at about PLN370m, following debt repayment after completion of investments at the city's major companies. PUHP Lech sp. z o. o., which completed the construction of a solid waste incineration plant in 1H16, should be able to repay its debt (PLN164m loan, guaranteed by the city) itself, thus limiting risk to Bialystok's budget.

Until 2029, the city will be providing financial support (in the form of capital grants) for the repayment of debt raised by Stadion Miejski Sp. z o. o. for stadium construction (about PLN103m at end-2015).

RATING SENSITIVITIES

Bialystok's ratings could be upgraded if the city improves its operating performance with an operating balance fully sufficient for debt service and if it maintains a direct debt/current balance ratio at about eight years on a sustained basis.

A downgrade could result from a deterioration in operating performance, with a direct debt to current balance deteriorating above 15 years on a sustained basis or a significant increase in net overall risk to above 100% of current revenue. Self-financing capacity before debt repayment (current balance plus capital revenue) consistently falling below 70% of total capex would also be rating negative.