OREANDA-NEWS. March 16, 2015.  Fitch Ratings has affirmed the City of Porto's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+'. The Outlooks are Positive. The Short-term foreign currency IDR has been affirmed at 'B'.

KEY RATING DRIVERS
Porto's ratings reflect the strong monitoring of the central government and Porto's ability to post a healthy operating margin as well as its moderate debt. The ratings also take into account the prudential management and the fact that Porto functions as a service centre in the region of North of Portugal. The Positive Outlook reflects that on Portugal's ratings (BB+/Positive).

The central government oversees cities' accounts and budgets while the national Court of Accounts approves financial liabilities. The limited role of the intermediate tiers of government (province and region) in Portugal strengthens the link between central government and the cities. Nevertheless, the sovereign rating has an indirect impact on Fitch's assessment of the Portuguese institutional framework.

In this still complex economic environment, Porto has demonstrated its ability to maintain a high operating margin, always above 17%, since 2009. The city has also been able to post a surplus before debt variation, in part due to its ability to adjust capital expenditure. In 2013 the city reported a surplus equivalent to 4.6% of its total revenue, while in the past three years the surplus before debt variation was EUR27m. The 2014 preliminary accounts confirm a consistent performance with the expected operating margin exceeding 20%, due to strengthening of tax collection over the year.

Porto reduced outstanding debt to EUR97m in 2013, representing 63% of its current revenue. According to preliminary results, in 2014 the city kept its deleveraging policy so total debt reduced to EUR87.3m. The city's administration has implemented measures to improve its efficiency. It currently has about 2500 employees, down from over 3,500 employees in 2001.

Fitch considers that the city has a prudent policy regarding finances, with numerous decisions to curb spending when tax revenues were decreasing. The council has also opened the renovation of the city centre to the private sector. This approach is further demonstrated by the fact that the city has outperformed the initial budget since 2010, sometimes significantly. Under Fitch's base case scenario, we expect the city to post an operating margin above 18% in the medium term, in line with that recorded in 2011-2013.

The 2015 budget is based on a prudent operating revenue forecast, and discipline in managing spending, with the intention to further reduce debt to well below 60% of current revenues. The city's budget indicates that its current balance would be around EUR15m, and if this budget materialises, the city would still have a current margin of 10%.

With an estimated population of 0.237m in 2014, the City of Porto is the second largest cultural, administrative and economic Portuguese centre, where about 0.5m people have their daily activities. Porto is the business centre of a greater metropolitan area that comprises 14 municipalities with 1.5 million inhabitants. The city is wealthy and attractive, with a lot of potential, particularly in tourism thanks to its unique features in its historical centre that was classified by the UNESCO as World Cultural Heritage in 1996. The city's key responsibilities are nursery and primary education; civil protection and police; housing and environmental protection; street lighting and urban equipment.

RATING SENSITIVITIES
If the sovereign ratings were upgraded, it is likely that Fitch would upgrade Porto's ratings, provided that the city's fundamentals remain sound.

Porto could be downgraded in case of drastic deterioration of budgetary performance, which Fitch considers unlikely in the medium term.