OREANDA-NEWS. Fitch Ratings has affirmed the Polish Municipality of Ostrow Wielkopolski's National Long-term rating at 'A(pol)'. The Outlook is Stable.

The affirmation reflects the city's sound operating performance, which we expect to maintain over the medium-term, together with its prudent financial and strategic management. The rating also factors in the small size of the city's budget, which makes it more vulnerable to negative changes in economic trends.

KEY RATING DRIVERS
For 2015-2017 Fitch expects Ostrow to report an operating margin of 16%, or an operating balance at PLN35m, comfortably covering Fitch-estimated debt service requirements of PLN12m per year. In 2014 city's operating balance amounted to PLN31m, or 15.4% of operating revenue, covering debt service by 3x.

Fitch expects Ostrow's new administration to maintain operating spending control and a prudent approach to budgeting in the medium term. The city administration's policy to steadily increase revenue has increased the city's self-financing capacity significantly, meaning there is little pressure to increase debt materially. This policy should mitigate the effect of higher operating spending stemming from underfunded responsibilities that were transferred to local governments by the State. The city's administration is aware of Ostrow's small budget and its exposure to adverse changes in the local economy or institutional framework.

Debt financing requirements should remain limited in the medium term. Fitch forecasts that Ostrow's direct debt in 2015-2017 will not exceed 35% of current revenue (2014: 36%). Projected operating balance on average of PLN35m in the same period should comfortably cover annual debt obligations. Fitch expects the debt coverage ratio to remain at two to 2.5 years over the medium term.

Ostrow is a small-sized city (72,900 inhabitants) but is located close to the capitals of three Polish regions. This proximity makes the city an attractive place to live in. Unemployment in the city in April 2015 (7.9%) was below the national average (11.2%) and has been decreasing since 2010. However, Ostrow's wealth indicators are weaker than the national average. Gross regional product per capita in Kaliski subregion, where Ostrow is located, was 16% below the national average in 2012 (last available data).

RATING SENSITIVITIES
The ratings could be upgraded if operating performance further improves with an operating margin of 20% and direct debt not exceeding 25% of current revenue on a sustained basis.

The ratings could be downgraded if operating performance deteriorates with an operating margin consistently below 15%. Direct debt materially above 35% of current revenue, driving the debt coverage ratio above 10 years, would also be negative for the ratings.

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