OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed the Polish Region of Wielkopolska's Long-term foreign currency Issuer Default Rating (IDR) at 'A-', Long-term local currency IDR at 'A' and its National Long-term rating at 'AA+(pol)'. The Outlooks are Stable. Fitch has also affirmed the region's Short-term foreign currency IDR at 'F2'.

The affirmation is based on Fitch's unchanged baseline scenario regarding the region's sound operating performance, which together with solid strategic and financial management supports healthy debt service and debt payback ratios.

KEY RATING DRIVERS
Fitch expects Wielkopolska to continue to demonstrate solid operating performance in 2015-2017, with an operating margin of at least 17%. This will be derived from the authorities' continued cost control measures, coupled with significant flexibility to limit opex growth and the expected growth of the national economy, supporting the revenue inflow from income taxes.

In 2014, Wielkopolska posted an exceptionally high operating margin of 24.3% (2013: 18.4%), mainly due to strict monitoring and rationalisation of spending, and high growth of revenue from income taxes. Fitch notes that these results were also supported by one-off revenue items relating to a VAT refund of PLN29m, and an additional equalisation payment of PLN28m. However, even excluding this revenue, the region's operating margin would constitute 20%, which was still above our expectations and above the 2010-2013 average (16.9%).

Fitch expects Wielkopolska's capital expenditure to remain high in 2015-2017 at PLN350m per year or 30% of total expenditure. Thanks to possible EU financing, the region's capital revenue should also be high, averaging about PLN150m annually in 2015-2017. Coupled with the projected operating balance, this should limit Wielkopolska's recourse to debt in the medium term.

Fitch's base case scenario expects Wielkopolska's direct debt for 2015-2017 to remain moderate, at about 55% of current revenue. At end-2014, the region's direct debt was PLN502.5m, or 52% of current revenue (2013: PLN441m and 49%). In the same period, debt servicing (principal and interest) will be around 37% of the operating balance. Debt-to- current balance, although deteriorating to about three to four years from 2.3 years in 2014, will still remain well below the region's final debt maturity (11 years).

Regional healthcare entities may require financial support through guarantees or capital injections from Wielkopolska in the medium term. However, this should not affect the rating, as it will not put much pressure on the budget. Thanks to the region's strict monitoring of their financial performance and ongoing restructuring, the sector's financial situation is improving and is better than in many other regions in Poland.

RATING SENSITIVITIES
An upgrade of the Polish sovereign rating, accompanied by a continuation of the region's sound operating performance could lead to similar rating action on Wielkopolska. Conversely, sustained deterioration in the operating margin, or a significant rise in Wielkopolska's direct debt, resulting in weak debt payback of above nine years could trigger a downgrade.

KEY ASSUMPTIONS
Fitch expects the region to continue its efficient operating expenditure growth control and to manage the budget prudently in the medium term.

Fitch assumes that the region will continue to receive EU funds to co-finance its investment programme.

Fitch also assumes that the region will continue to comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU. Otherwise, Wielkopolska will face the penalty of having to return previously received EU grants.