OREANDA-NEWS. Fitch Ratings has affirmed the Polish 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 liquidity and strong debt ratios, which we expect to be maintained over the medium term.

KEY RATING DRIVERS

The ratings factor in Katowice's strong capacity for self-financing investments, due to satisfactory fiscal performance and expected significant capital revenue. The ratings also reflect expected strong growth in debt servicing over the medium term, which is mitigated by the city's high liquidity buffers and prudent debt policy.

Our base case scenario expects Katowice's operating performance to remain satisfactory, fuelled by growing income and local tax revenue due to expected national economic growth. We forecast the operating balance to average PLN200m annually, or 11% of operating revenue in 2016-2019, excluding some non-recurring operating revenue.

The city's operating result in 2016 will be supported by one-off revenue from the property transfer tax. As a result, the city's operating balance is projected to total PLN225m, or 13.5% of operating revenue and excluding the one-off items, PLN185m or 11% (2015 without one-off revenue: PLN182m or 12.2% respectively). The latter would be in line with the average operating margins in 2011-2014.

Operating expenditure is under pressure, and without the one-off revenue, opex growth would be comparable to operating revenue growth. As a result, an inability to constrain operating expenditure growth could be rating-negative.

As with all other municipalities in Poland, Katowice launched a central government "Family 500+" programme in April 2016. The flow of funds from the central government, inflating both sides of the budget by about PLN70m in 2016, will be neutral to Katowice's operating balance. The programme launch also means comparison of the operating and current margin ratios, and the debt-to-current revenue ratios, between 2015 and 2016 will be less than meaningful.

For 2016-2019 we forecast Katowice will spend PLN1.4bn on capex, ie about 17%-20% of total expenditure. Half of the capex will be on roads, more than 20% on public transport, and the remainder on sport, culture and thermos-modernisation. We expect that on average over 50% of investment financing will come from the city's current balance and about 35% from capital revenue. The rest will be covered by available cash (from 2016) and additional debt (from 2017).

We expect the city's liquidity to remain sound in the medium term, which is positive for the ratings. Investment will absorb part of its significant cash reserves (2015: PLN262m), but still leaving a sound cash balance of PLN200m by 2019. Cash reserves should still significantly exceed projected debt service, even though the latter is likely to increase to PLN65m by 2019 (2015: PLN33m) as two European Investment Bank (EIB) loans totalling PLN400m start to be redeemed from 2016.

Katowice's direct debt is likely to fall to PLN650m in 2016, in line with the EIB redemption, before gradually increasing to PLN720m in 2018-2019. Debt is, however, unlikely to exceed 45% of current revenue, similar to levels reported in 2013-2015. The debt payback ratio (direct risk-to-current-balance) should remain healthy at a moderate three to four years in 2016-2019 (2015: three years), below the city's weighted average debt maturity of about 18 years.

The city is the centre of a large Katowice conurbation, with 2 million inhabitants out of 4.6 million in the whole Slaskie region. The city's economy is well diversified and service-orientated, with 67.8% of gross value added and 77% of employment from this sector in 2013 and 2014, respectively (both above the national average of 63.4% and 52%, respectively). GDP per capita in the Katowice sub-region in 2013 was 138.1% of the national average, ranking it the eighth-largest out of 72 sub-regions and translating into the city's high tax revenue.

RATING SENSITIVITIES

The ratings could be upgraded if Katowice improves its operating performance with an operating balance at above 15% of operating revenue on a sustained basis and if it maintains a debt payback ratio of below three years.

Conversely, a 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 negative rating action.