OREANDA-NEWS. June 10, 2015. Fitch Ratings has revised the Metropolitan Municipality of Bursa's Outlook to Positive from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB' and National Long-term rating at 'AA-(tur)'.

The affirmation reflects Bursa's continued strong operating performance (above 40% in 2014) and expenditure discipline with a realisation rate just below the 100% of the budgeted amount, leading to a reduction of its debt stock.

The revision of the Outlook reflects that in line with Fitch's expectation, the new Law on 6360 has boosted Bursa's tax revenue base, increasing operating revenue by 35% yoy. Coupled with improving financial planning and budget discipline, the payback ratio continued to decline below five years to 2.9 years for a second consecutive year. This led to a budget surplus before debt variation for the first time since 2007.

KEY RATING DRIVERS
Bursa's rating reflects high debt levels, significant but decreasing unhedged foreign currency exposure and moderate capex investments, which are balanced by its strong operating performance, due to its well diversified strong local economy base.

Since 2013 Bursa has not taken on new foreign currency-denominated debt. This is in line with Fitch's expectations and demonstrates the city's commitment to reducing its FX liabilities. In 2014, Bursa's FX debt decreased to 59.5%, from 63.7% of its total debt, both due to a reduced absolute amount in FX and the lira's appreciation against the euro by 6.4% yoy. At end 2014, Bursa's direct debt had declined by 2.4% to TRY1,104.5bn for the first time since 2009, mainly due to the improving budgetary, fiscal and capex planning.

Bursa's unhedged foreign currency-denominated debt exposes the city to FX risk. All of its FX debt is euro-denominated and the lender portfolio consists of multilaterals. The weighted average maturity of its total debt was 10.2 years, well above its debt to current revenue with 2.9 years.

The city accomplished the majority of its capital-intensive metro line construction (East-West Line by 40km) by 2013. From 2015 onwards, the administration plans to invest in tram wagons to meet demand during peak hours. Fitch projects capex will account for below 40% of total expenditure on average in 2015-2017.

Bursa's indirect risk doubled to TRY401.2 m at end-2014, mainly because of the increase in public services due to Law 6360, which increased Bursa's size. The municipality has three majority-owned companies and two public entities, and debt at these five public sector entities (PSEs) is self-supporting. Similar to other Turkish metropolitan municipalities, Bursa supports its PSEs with regular capital injections.

RATING SENSITIVITIES
Sustainable reduction of overall risk, continued large operating surpluses as a result of the tax revenue boost by Law 6360 and continued strong budgetary performance, with operating expenditure within budget and prudent debt management would be positive for the Long-term IDRs and National Ratings.

KEY ASSUMPTIONS
Fitch forecasts tax revenues will increase by 14% with an expected inflation rate of 8% annually on average, and a continuation of the expenditure discipline leading to strong operating margins above 40% in 2015-2017. Fitch also assumes Bursa's debt payback ratio will decline to about three years on average in 2015-2017, supported by improved budgetary and financial planning.