OREANDA-NEWS. July 28, 2015.  Fitch Ratings has affirmed the Romanian City of Bucharest's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-', Long-term local currency IDR at 'BBB' and Short-term foreign currency IDR at 'F3'. The Outlooks on the Long-term IDRs are Stable.

The affirmation reflects Bucharest's continuous strong operating performance and moderate debt servicing ratios. The Stable Outlook reflects Fitch's expectations that Bucharest's budgetary performance will remain sound and the city's debt ratios will remain at least broadly in line with 2014's levels, after a slight increase of debt in 2015, when Fitch also assumes real GDP growth will continue.

KEY RATING DRIVERS
The ratings reflect Bucharest's economic and financial centre functions due to its status as Romania's capital, with wealth far above the national average, and strong budgetary performance. They also reflect the high dependence of the city's operating revenues on the economic cycle, high investment needs and uncertainty over its contingent liabilities.

Bucharest recently extended its debt maturity profile and reduced its exposure to foreign currencies. The city repaid its EUR500m eurobond maturity in June 2015 with four domestic bonds of RON555m each, maturing in 2018, 2020, 2022 and 2025.

Outstanding direct risk totalled RON2,977m at end-2014 and was 2.4 years of the city's current balance. Debt-to-current revenue improved to 68% (2013: 73%) and debt management is prudent. Interest expenditure was a moderate 3.1% of operating revenue, while annual debt service was a low 6.2% of current revenue in 2014. Direct risk may increase slightly to RON3,002m (applying RON/EUR and RON/USD exchange rates as of 30 June 2015) at end-2015, after considering a partial repayment of existing loans and estimated drawings for two loans from International Finance Corporation and the Romanian Development Bank (BRD). Bucharest's debt is prudently managed and its debt service ratio (debt service/own revenues) of 7.81% at end-2014 was well below the statutory limit of 30%.

At end-June 2015, Bucharest was exposed to about RON149m of debt service and guarantees on two wholly owned companies and one minority shareholding. The independent heating distribution unit Radet, a local entity with legal status under the authority of the Bucharest City Council, had liabilities totalling RON3.5bn to SC Electrocentrale Bucuresti SA at end-June 2015, consisting of heating consumption bills, current penalties and penalties subject to a final court ruling.

Bucharest's operating margin was 29.5% in 2014 (2013: 26.3%), in line with the five-year average of 29% and was more than adequate to pre-finance the city's investments. In 2014, the current balance covered a strong 145% of the city's capital expenditure while the operating margin covered interest payment by at least 10x. End-May 2015 revenue collection was in line with the budget and above 2014 results. The city's three-year financial plan forecasts that the operating margin will remain at around 30% until 2018.

Romania's GDP grew 2.8% in real terms in 2014 and Fitch expects this to slightly slow to 2.6% in 2015 before improving to 3.2% in 2016, well above the average of 1.4% reported in 2010-2014. Local wealth is more than 2x the national average and robust through economic cycles due to a well-diversified economy. A large proportion of employment results from the presence of public bodies in the national capital. This contributes to an unemployment rate of just 2% at end-2014, well below the national average of 5.1%.

RATING SENSITIVITIES
Bucharest's ratings are at the same level as the sovereign's. Maintaining its strong operating performance that ensures investments are largely funded by internal resources, together with debt below 100% of current revenue, would be rating-positive, provided the sovereign is also upgraded.

A significant increase in debt pressure due to deterioration of operating performance as well as recognition of contingent liabilities linked to the city's PSEs as direct debt would trigger negative rating action.

KEY ASSUMPTIONS
- Stable regulatory framework
- Economic progress in line with Fitch's forecasts
- Contingent liabilities in the form of penalty interest by Radet will not result in additional debt for Bucharest.