OREANDA-NEWS. June 10, 2015. Fitch Ratings has affirmed the Romanian City of Oradea's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and Short-term foreign currency IDR at 'F3'. The Outlooks on the Long-term IDRs are Stable.

The affirmation reflects Oradea's stable economy translating into sustainable own tax revenues, sound budgetary performance, and supportive regulatory framework. The ratings take also into account its ambitious investment plans, which may require a further debt increase in 2015-2017. The Stable Outlook reflects Fitch's view that Oradea will comply with its statutory debt servicing limits and that debt metrics will remain in line with our expectations thanks to prudent debt management.

KEY RATING DRIVERS
Given its historical good revenue performance and improved collection rates of taxes and fees as well as operating cost-cutting efforts, Oradea's operating margin should remain around 25% in 2015-2017. The margin increased to 27.4% in 2014 (2013: 20.9%) thanks to higher current transfers received. The margin is sufficient to cover interest costs by at least 15x. The current margin is over 25%, which covers the city's investments by 84% in 2014. Oradea reported a surplus before debt variation of 8.3% of total revenues.

Oradea is continuing its ambitious investment plan with investments expected to reach an historical high in 2015, which could result in an increase in debt to about RON359m or 76% of current revenue (2014: RON301m, 70%). However, due to its consolidation efforts, Oradea has been able to expand revenue and improve its margin. Consequently, Fitch expects the city to keep sound debt coverage ratios, well in line with its rated peer group as well as its statutory debt limit at least in 2015-2016.

In 2013, guarantees fell to zero and total non-guaranteed debt of Oradea's municipal companies considerably increased. However, risk stemming from these companies slightly decreased in 2014, with debt down by RON2.5m to RON373m. According to the city, its risk on Electrocentrale is limited to RON30.7m.

Oradea operates within a conservative regulatory framework with statutory debt limits. Although debt is assumed to increase through the medium-term financial plan until 2018, it will remain below the statutory limit, according to the city.

Romania's GDP grew by 3% in real terms in 2014 (2013: 3.5%). Fitch expects GDP growth to be slightly lower at 2.7% in 2015. This should sustain the city's transfers, largely from redistributed VAT, which is collected by the government and transferred to local governments.

Oradea, the capital city of Bihor County benefits from its proximity to the Hungarian border and having successfully established an industrial park, the city is attractive to investors and for working purposes. Its unemployment rate is below that of Romania (2015: 6.4%) and its wealth level above the national average.

RATING SENSITIVITIES
Positive rating action would be triggered by an operating margin consistently above 20%, and debt service and debt payback ratios not exceeding 50% of the operating balance and seven years respectively, associated with a reduction in debt-funded investments. However, an upgrade of the foreign currency IDR would rely on an upgrade of the sovereign's foreign currency IDR, as local and regional governments' ratings cannot be above the sovereign's.

Negative rating action could be triggered by a weaker operating performance resulting in reduced coverage of capital expenditure and a concurrent deterioration in debt and debt service ratios.

KEY ASSUMPTIONS
- Stable regulatory framework.
- Economic progress in line with Fitch's forecasts.
- Realisation of the city's scheduled improvements of operating revenues and cost-cutting efforts.
Implementation of EU projects does not result in co-funding requirements beyond the city's schedule.