OREANDA-NEWS. April 21, 2015. Fitch Ratings has revised the Polish City of Kielce's Outlook to Positive from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) 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 to maintain satisfactory operating performance in 2015-2017 with an operating margin averaging 7-8%. This will be sufficient to meet its debt-service obligations by 1.7x-2x and support the debt-to-current balance ratio of 10-11 years. This forecast is based on the assumption that the local authorities will keep operating expenditure growth below operating revenue growth. Additionally national economic growth should support the local economy's development and positively impact the city's tax revenue.

The city administration's cost-control approach and prudent financial policy contributed to its improved operating performance in 2013-2014. In 2014 Kielce's operating margin was 7.3%, in line with Fitch projections and above the average for 2010-2012 of 5.3%

MEDIUM
Fitch forecasts Kielce's direct debt for 2015-2017 to remain moderate, at around 65%-70% of current revenue, given its smaller debt appetite than most of its peers. We expect the city's annual capex to peak at PLN300m in 2015 (24% of total spending), as a result of shifting some investments from 2014 to 2015 and final payments for investments co-financed from the 2007-2013 EU budget.

Rolling out investments co-financed by grants from the new 2014-2020 EU budget may take time. The next peak of capital spending is likely to come in 2018-2020, but we assume that the majority will be financed by capital revenue (including EU funding) and the current balance, limiting the city's debt financing needs. The city's goal is to exploit funds available for Polish LGs under the 2014-2020 EU budget, from which they may apply to up to 85% of co-financing.

To limit the growth of more rigid expenditure, the city's authorities are closely monitoring spending on employment, optimising the school network, organising collective tenders for utilities and modernising public buildings. These measures should allow Kielce to keep operating spending increase below operating revenue growth in the medium term.

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

Fitch expects the city's indirect risk to remain low in the medium term as it relates only to debt of PSEs (PLN68m in 2014), which are mostly self-supporting. The city supports some of its companies with capital injections, which totalled PLN13m in 2014 or 5.9% of total capex.

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

RATING SENSITIVITIES
An upgrade may result from the city maintaining its operating performance in line with 2013-2014 results, and a debt-to-current balance ratio at below 12 years.