OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed the Polish City of Plock's foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and Long-term National rating at 'A+(pol)'. The Outlooks are Stable. Fitch has also affirmed Plock's PLN80m and PLN86.9m senior unsecured bonds' Long-term local currency rating at 'BBB' and their National Long-term rating at 'A+(pol)'.

The affirmation reflects the city's wealthy tax base, which is dependent on companies from the petrochemical sector, and sound direct debt ratios. The ratings also consider debt at municipal companies, although this should not put pressure on the city's budget as it is mostly concentrated on self-supporting companies.

KEY RATING DRIVERS
Fitch expects Plock's operating performance to stabilise in 2015-2017 with the operating margin at an average 7%-8% and the operating balance 1.4x higher than annual debt service expences (interest and instalments). The debt payback ratio is expected to be 11 years on average. This forecast is based on the assumption that the city's authorities control operating expenditure and keep it below operating revenue growth. National economic growth should also support the local economy's development and positively impact the city's tax revenue.

Plock's operating margin was 7% in 2014, in line with Fitch's projections, and the operating balance of PLN50m fully covered debt service (instalments and interest). Operating revenue recovered in 2014 as a result of recovery of income taxes, mainly personal income tax (PIT) and some one-off revenue i.e. a VAT refund in 2014.

Plock's local economy is linked to the petrochemical sector. Petrochemical companies with their large property estate provide high property tax revenue (25% of operating revenue), and high PIT (20% of operating revenue) to the city's budget and support high corporate tax revenue. However, they also expose the city's budget to the oil industry's economic cycle.

Fitch expects the city's direct debt to grow in 2015-2016 as a result of investment but to remain manageable at below 70% of current revenue (66% in 2014). From 2017, the city aims to increase the share of own revenue in capex financing instead of incurring new debt. Despite growth, the debt-to-current balance ratio should remain safe at around 11 years in the medium term.

The city's authorities wants to use funds available for Polish local governments under the 2014-2020 EU budget to co-finance its capex, although this may take time. The new EU co-financed investments are not expected before 2016. We expect the share of EU grants may be around 30% of city's capital revenue in the medium term. The city's investment will remain focused on local infrastructure improvements, mainly roads.

Fitch views positively the city's debt policy. The city authorities' incur long-term debt with a grace period of one year and a 14-year repayment period. All Plock's outstanding debt is indexed to floating interest rates, which exposes the city to interest rate risk. Debt is fully PLN-denominated, so the city is not exposed to FX risk.The debt amortisation profile is smooth, spread until 2030. We expect this policy to continue in the medium term.

Fitch expects the city's indirect risk to remain moderate in the medium term. It relates to PSEs debt (PLN150m in 2014, preliminary data). These companies financed investments with debt and EU grants and are mostly self-supported companies. The city supported some of its companies with capital injections. Plock has issued a guarantee (PLN27m outstanding at end-2014) to secure the debt of municipal companies, which incurred preferential loans maturing by 2050. As loan repayments are financed through tenants' rental fees, they do not pose a risk to the city's budget.

RATING SENSITIVITIES
The ratings could be downgraded if the city is unable to maintain its operating performance at the current level on a sustainable basis and the operating balance was insufficient to meet debt service obligations.

The ratings could be upgraded if the city improves its operating margin to above 12% on a sustainable basis and the operating balance fully covers annual debt service.

KEY ASSUMPTIONS
Fitch assumes that operating expenditure does not grow faster than operating revenue leading to deterioration of operating margin.

We assume the investment programme will not be significantly extended leading to an increase in the city's demand for new debt.