OREANDA-NEWS. March 16, 2015. Fitch Ratings has revised the Polish City of Bydgoszcz's Outlook to Positive from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and National Long-term rating at 'A(pol)'.

KEY RATING DRIVERS
The Outlook change reflects the following key rating drivers and their relative weights:

HIGH
Fitch expects the city's operating performance to continue improving and remain solid, provided the city's management continues with opex rationalisation. Bydgoszcz's robust management enabled the city to achieve a sound operating margin of 9.5% in 2014 (2013: 9%) in line with Fitch's projections. In the medium term, we expect the operating balance to be at least 10% of operating revenue and sufficient to cover annual debt obligations by 2x.

Fitch expects Bydgoszcz's capex will not be lower than PLN300m annually in 2015-2017 according to its investment strategy. The city's policy is to finance heavy infrastructure investments from EU funds received under the new programming period 2014-2020 and increasingly from the current balance. Fitch assumes that capital expenditure may account for at least 17% of total expenditure in 2015-2017, in line with the average spending of the past five years.

MEDIUM
Like many other Polish subnationals, Bydgoszcz faces pressure on operating spending. However, thanks to prudent financial management reflected by wide-ranging cost-cutting and efficiency measures, the city's authorities have been successful in keeping opex growth below operating revenue growth since 2011, which Fitch views as positive.

Fitch projects that Poland's real GDP will grow by 3% in 2015-2016. National economic growth should continue to support the development of city's economy. In addition, the city's local economy will benefit from the improving local infrastructure, which may stimulate business activity within the city and provide it with higher tax revenue.

Bydgoszcz's ratings also reflect the following key rating drivers:

As a result of investments, we expect that debt may grow to PLN1,350m at the end-2017 from PLN1,078m in 2014. However, it should not exceed a manageable 85% of the current revenue over the medium term. The debt to current balance ratio should remain safe below 10 years. When the city sell its stakes in heating company KPEC, the proceeds may be used for capex financing and limit debt borrowing needs in 2015-2017.

Fitch expects the city's indirect risk to peak at about PLN830m in 2015 from PLN654m at end-2014. This increase will result from debt-financed investments by its municipal companies, including the tramline and the construction of the incineration plant. Although most of these are self-supported, some of the projects may need the city's financial assistance.


RATING SENSITIVITIES
The ratings could be upgraded if the city maintains its sound operating performance reflected with an operating balance sustainably above 10% of operating revenue with a debt to current balance below 10 years.