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

The affirmation reflects Bydgoszcz's sound operating performance, supported by strong financial management and a growing local economy. The ratings also incorporate moderate debt and healthy debt payback ratios.

KEY RATING DRIVERS

We expect Bydgoszcz will continue to post an operating margin at around 11% and an operating balance that is 2.5x-3x annual debt service over the medium term. This is based on the assumption that the city's management will retain control of operating spending and that revenue from local taxes and fees will continue to grow, supported by the expansion of the city's tax base and a growing economy.

We expect the city to post a small budgetary surplus in 2016, similar to last year (PLN13.4m or 0.8% of total revenue). Due to prolonged delays on the national level in launching EU funds, the city's capex will be lower than budgeted at the beginning of the year, in line with 2015's PLN240m. As a result direct debt should be stable at PLN1.1bn for 2016.

In 2017-2018 we expect debt to grow by around PLN70m p. a., following the acceleration of new EU-financed investments. However, debt should remain moderate, at no more than 75% of current revenue. The debt-to-current balance ratio should remain at around eight years, below the city's average debt maturity estimated by Fitch of 15 years.

Bydgoszcz's management practices are a supportive rating factor. The city has rationalised operating spending and taken actions to increase revenue. The city's authorities are focused on creating conditions conducive to business development, on attracting new investors and on improving local infrastructure by taking advantage of the grants from the EU budget for 2014-2020. Fitch assumes that capital expenditure will account for at least 17% of total expenditure over the medium term, with significant amounts spent on roads and public transport.

We expect municipal companies' debt to decline over the medium term, after peaking in 2015 at PLN840m, following the completion of large investments. In Fitch's view, the municipal companies' debt does not constitute a major risk for the city's budget as most of these companies are self-supporting and repay debt with their own resources.

As with other municipalities in Poland, Bydgoszcz launched the "Family 500+" programme in April 2016, which pays out a cash benefit of PLN500 per month per child to families with more than one child. The local government will disburse the benefit - estimated at PLN95m in 2016 - made by the central government through transfers. As a result the programme is neutral to Bydgoszcz's operating balance. This means comparison of operating and current margins, as well as debt-to-current revenue between 2016 and 2015 will be less than meaningful.

Bydgoszcz is a large Polish city with around 358.000 inhabitants. GRP per capita in the Bydgosko-Torunski sub-region, where the city is located, was 103.9% of the national average in 2013. Bydgoszcz's economy is diversified, with services playing an important role. The local economy has benefited from improvements in local infrastructure leading to increased business activity and, consequently, higher tax revenue. The unemployment rate in the city is on a declining trend. In June 2016 it was at 5.1%, significantly below the national average of 8.8%.

RATING SENSITIVITIES

The ratings could be upgraded if the city further improves its operating performance, as reflected by an operating margin above 13% on a sustained basis and direct debt reduction towards 60% of current revenue.

The ratings could be downgraded if the operating margin deteriorates to 2013-2014 levels, accompanied by debt at above 90% of current revenue, resulting in significant deterioration in the debt-to-current balance ratio to beyond 10 years.