OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed the Polish City of Poznan's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A-'. The Outlook is Stable.

KEY RATING DRIVERS
The ratings reflect Fitch's expectation that the city will maintain its strong performance and decrease its direct debt over the medium term. The ratings also consider the municipal companies' high debt, which will further rise to finance investments. Fitch believes that Poznan's wealthy local economy and high fiscal flexibility will support revenue growth and help mitigate continuing pressure on operating costs.

The city's operating margin should stabilise around 14% in the medium term, according to Fitch's projections. The city has high flexibility to generate own revenues, which will be supported by the growth in the national economy that Fitch expects. Additionally, we assume that Poznan will continue with measures aimed at limiting expenditure growth allowing the city to mitigate continuing pressure on operating costs. The pressure stems from a rigid cost structure and the necessity to maintain newly-built infrastructure, among others. Poznan's operating margin improved to 14.8% in 2014 from 10%-11% in 2011-2012.

Fitch expects Poznan's direct debt to decrease to 55% of current revenue by end-2016, which will be an improvement from the average 75% of current revenue in 2011-2013. We project debt at about PLN1.5bn at end-2016 as the city does not expect a significant increase in its investment programme until new EU grants become available under the 2014-2020 framework. Fitch assumes that the city will spend PLN1.3bn on investments in 2015-2016.

In 2014, the city earlier redeemed PLN83m of debt. Outstanding debt was PLN1.64m at year-end. The operating balance covered the annual debt service (principal and interest) by 1.4x calculated with the prepayment and over 2x without. Fitch projects that the city's operating balance should cover principal and interest payments by at about 1.8x in the medium term.

Fitch expects indirect risk (debt of and guarantees on companies related to Poznan) to further grow to PLN1.3bn in 2015 from PLN1.1bn in 2014. This will result from the municipal companies' investments. We consider this level of indirect risk to be still manageable due to the companies' strong self-financing ability and as their current business plans do not foresee financial assistance from the city. However, the proportion of the indirect risk to the city's direct debt was 68% in 2014, i.e. the highest among peers and is expected to grow to about 80% in 2015-2016.

Poznan's diversified and wealthy economy has resulted in gross domestic product per capita of 2x the national average. Services dominate the local economy. The sector produces 73% of gross value added and employs about 77% of the local workforce. At end-February 2015, the unemployment rate was 3.4% and the lowest among Polish cities and far below the national average of 12.0%.

RATING SENSITIVITIES
The ratings could be upgraded if the city maintains its operating margin above 15% on a sustained basis accompanied by contained net overall risk growth and an upgrade of the sovereign rating (A-/Stable).

A downgrade could result from sustained deterioration of the operating margin far below Fitch's expectations, or a significant rise in direct debt leading to the city's debt payback ratio (debt to current balance) exceeding 10 years.