OREANDA-NEWS. Fitch Ratings has affirmed the ratings for the Metropolitan Municipality of Lima (MML) as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Long-term local currency IDR at 'BBB+'.

The Rating Outlook is Stable.

The rating action reflects MML's financial strength as well as its manageable debt metrics.

KEY RATING DRIVERS
MML's ratings reflect its national importance as the economic and political capital of the country and its high and dynamic collection of municipal taxes, which supports high-margin operations. Despite a decline in operating margins and expected increase in debt burden, the strong fiscal position of MML will result in manageable debt metrics.

However, the ratings also factor in MML's significant investment plans, a substantial portion of which is expected to be debt funded and which will add pressure to operating expenditure going forward.

MML has the status of a special region with 43 districts within its jurisdiction. It accounts for around 45% of Peru's gross domestic product (GDP) and for around 28% of the total population of the country. An increasing tax base generated by population growth and the implementation of fiscal policies have led to a significant increase in municipal income by over 47% since 2010. Also, an important factor in increased revenue generation has been the efforts by the administration to reduce and collect tax arrears.

In addition to taxes, historically MML also collected toll road payments, but in 2013 this revenue source was transferred to new concessionaries. Although this has resulted in a sharp decline in fees, the overall impact in the operating balance is neutral as the concessionaries are responsible for the roads' maintenance and operations.

The decline in operating margins in 2012-2014 (from 41% to 27%) was largely attributable to reduction in municipal revenues, essentially from the elimination of toll fees, and significant increase in staff expenditure following a legal ruling. Nevertheless, MML estimates that the growth in staff expenditure in the future will be more moderate. MML's budgetary performance continues to be strong. Fitch's base case scenario projects comfortable operating margins, of between 25-30% in the next three years, and Fitch expects that MML will continue maintain strong budgetary discipline under the new administration.

MML's responsibilities are largely focused on public transportation and capital expenditure. The Municipality is defining its capital expenditure program under the new administration which will largely be undertaken in 2015-2018. However, some of the capital expenditure in the city will also be financed by the private sector under PPP schemes but will require some form of availability payments from the municipality.

MML's debt increased by close to 93% in the past two years to PEN497 million (USD156.3 million). The debt burden remains moderate with debt as a proportion of current revenue estimated at 48% at end 2014. However, this ratio is likely to reach close to 100% by end 2017 given the expected increase in debt funded capital expenditure, in a context of low growth in current revenues estimated by Fitch. Presently all debt servicing have priority payment through formal and administrative trust deeds, which is a positive rating factor. Fitch expects that despite an increase in debt burden, MML fiscal position and high operating margins will still result in manageable debt metrics.

MML has a number of public companies, but these do not represent a significant burden to the municipality either because they are self-financing or because of their limited budget. The only entity that has required significant capital injection is the Municipal savings Bank in order to maintain capital adequacy ratios within the minimum required by regulation. Fitch will continue to monitor their financial situation to ensure that they maintain their financial profiles in line with levels registered in recent years.

RATING SENSITIVITIES
An upgrade of the sovereign rating, accompanied by Lima's solid operating performance, could trigger a positive rating action if performance is in line with expectations.

The current Rating Outlook is Stable, and Fitch's sensitivity analysis does not foresee any developments that would lead to a rating downgrade. However, future developments that may, individually or collectively, lead to a negative action include a significant deterioration in the budgetary performance beyond Fitch's base case scenario caused by a large increase in operational expenditure and/or decrease in revenue. Likewise, Fitch's projections consider the debt's plan of the administration, but an increase in its debt burden (long- or short-term) beyond these projections could trigger a downgrade.