OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed the Polish City of Rzeszow's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB'. Fitch has also affirmed the National Long-term Rating at 'A+(pol)'. All ratings have Stable Outlooks.

KEY RATING DRIVERS
The affirmation reflects Rzeszow's improving operating performance, in line with Fitch's expectations, its healthy debt ratios and low contingent risk. The ratings also take into account expected direct debt increase driven by large investment projects.

Fitch expects the city to demonstrate stable operating performance in 2015-2017 with an operating margin averaging 7%-8%. This will be supported by the city authorities' continued cost control measures and the expected growth of the national economy. In 2014 the city's operating performance further improved, with the operating balance accounting for 7.6% of operating revenue, or PLN64m in nominal terms, compared with a 2010-2013 average of 6%.

Finalising large infrastructure investments co-financed from the 2007-2013 EU budget may result in a larger budgetary deficit in 2015 of Fitch-estimated 17% of total revenue (2014: 8.5%).

Rzeszow's investment spending in 2015-2017 could total PLN1.3bn (on average 30% of annual total expenditure), as the city prepares to roll out investments under the 2014-2020 EU budget. Over 60% of investment financing may come from capital revenue and the city's current balance, provided Rzeszow's administration continues to be successful in obtaining high EU and state grants to fund its investment programme. The remainder will be covered by new debt.

Fitch expects that, in 2015-2017, the city's debt after investment could reach a still moderate 80% of current revenue (2014: 65% or PLN532m). However, despite this projected debt increase, Fitch expects the city's debt-service and -payback ratios to remain healthy. Debt service, projected to average PLN55m, is likely to be covered 1.1x-1.5x by the operating balance. The debt-to-current balance ratio is expected to be around 13 years, which will be in line with the city's weighted average debt maturity.

Rzeszow is the economic engine of south-east Poland, with a diversified economy and is an attractive city to inhabitants and private investors. GDP per capita has risen rapidly in the Rzeszow sub-region, in which the city is located, to 87% of the national average in 2012 (latest available data) from 74% in 2007. The dynamic and developing local economy continues to support the growth of the city's tax base and should lead to faster growth of tax revenue than its peers.

Rzeszow continues to increase the efficiency of its public services delivery and has no plans to use any quasi-debt instruments or to transfer risk or debt to its dependent entities. As a result, it has lower contingent liabilities than most of its Polish peers, at only PLN28m at end-2014 (2013: PLN20.5m).

RATING SENSITIVITIES
The ratings could be upgraded if Rzeszow sustainably strengthens its operating balance above 11% of operating revenue, accompanied by diminishing recourse to debt, resulting in an improvement of the debt-to-current balance ratio below 10 years.

The ratings could be downgraded if Rzeszow's growing debt is not accompanied by improvements to operating performance such that the operating balance materially fails to cover debt service for a sustained period.