OREANDA-NEWS. Fitch Ratings has upgraded the Polish Region of Wielkopolska's National Long-Term Rating to 'AAA(pol)' from 'AA+(pol)'. Simultaneously Fitch has affirmed the region's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A-' and Long-term Local Currency IDR at 'A'. All the Outlooks are Stable. Fitch has also affirmed the region's Short-Term Foreign Currency IDR at 'F2'.

The upgrade of the National rating reflects Fitch's view that Wielkopolska will continue to outperform 'AA(pol)' category peers in terms of its operating margin and debt ratios over the medium term.

The Stable Outlook reflects our expectations that Wielkopolska's strong operating performance, together with solid strategic and financial management, will support healthy debt service and debt payback ratios.

KEY RATING DRIVERS

The rating action reflects the following rating drivers and their relative weights:

HIGH

Fitch base-case scenario expects Wielkopolska's operating balance to account for 20%-25% of operating revenue in the medium term, above the 19% average in 2010-2015, which in turn will underpin the region's strong debt servicing and payback. The expected improvement will be supported by the region's effective cost control, flexibility to limit opex growth and the expected growth of the national economy (revenue from income taxes represented 57% of operating revenue in 2015).

In 2015, Wielkopolska again posted a high operating margin of 24.1% (2014: 24.3%), above the 18.4% average of 2010-2014. A significant current balance and high capital revenue allowed the region to generate a budget surplus of PLN75.2m (6.7% of total revenue) in 2015, despite high capex (31% of total spending).

Currently, the region is preparing to roll out new investments under the 2014-2020 EU programme period. This means Wielkopolska's investments in 2016-2018 could total PLN1.2bn-PLN1.4bn or an average 36% of annual total spending. This will be below the 2010-2015 average of 41%, as we do not expect material spending to be incurred before end-1H17.

However, similar to previous years, Fitch expects the region to finance the majority of its capital expenditure from the non-returnable investment grants available to Polish local and regional governments (LRGs) and from its current balance. This will limit Wielkopolska's recourse to debt over the medium term.

MEDIUM

The region has been reducing its debt since 2015, due to lower debt financing needs, and supported by sound budgetary performance. In 2016, Wielkopolska is unlikely to incur new debt, allowing it to further deleverage to about PLN400m or 42% of current revenue at year-end. Fitch expects the region's direct debt to return to a growth path from 2017 due to investments, but it should not exceed 50% of current revenue in the medium term (2015: 51%).

The region's debt service and debt payback ratios should remain sound, supported by projected solid operating performance in 2016-2018. During this period, its operating balance should cover 4x annual debt service (principal and interest), which Fitch estimates at PLN54m. The debt payback ratio (debt-to-current balance) is unlikely to exceed three years, below Wielkopolska's final debt maturity of 12 years.

Wielkopolska is the third-wealthiest region of 16 Polish regions in gross regional product per capita. In 2013 (latest available data) it amounted to PLN46,135 and was 7.3% above the national average. In nominal terms, the region accounted for 9.6% of Poland's GDP (the third-largest contributor after the regions of Mazowieckie (BBB+/Stable) and Slaskie). The region's economy is well diversified and services-orientated, with about 60% of gross value added (GVA) contribution from the sector (Poland: 63%). Wielkopolska's initiatives to support entrepreneurship, as well as improvement of the regional infrastructure, should show positive results in the medium - to long-term.

The rating action also reflects the following key rating driver:

The regulatory regime for Polish LRGs is fairly stable. Their activities and financial statements are closely monitored and reviewed by the central administration. The level of disclosure of the LRGs' accounts is satisfactory. The main revenue sources such as income tax revenue and transfers and subsidies from the central government are centrally distributed according to a legally defined formula, which limits the central government's scope for discretion.

RATING SENSITIVITIES

Currently the IDRs of Wielkopolska are constrained by the sovereign (A-/A; Stable Outlook), and will mirror movement in the sovereign IDRs.

Sustained deterioration in the region's operating margin, or a significant rise in direct debt, resulting in weak debt payback of above nine years could trigger a downgrade.