OREANDA-NEWS. September 15, 2015.  Fitch Ratings has affirmed the City of Porto's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+'. The Outlooks are Positive. The Short-term foreign currency IDR has been affirmed at 'B'.

KEY RATING DRIVERS

Rating Constraint
Porto's ratings remains constrained by the Portuguese sovereign (BB+/Positive), in accordance with Fitch's criteria. As with other Portuguese cities, Porto's accounts and budgets are overseen by the central government and its financial liabilities are approved by the national Court of Accounts. The limited role of the intermediate tiers of government (province and region) in Portugal strengthens the link between the central government and cities.

Porto's intrinsic credit profile is stronger than its ratings indicate, due to the city's healthy budgetary performance, its moderate debt as well as the strong oversight by the central government. Prudent management and Porto's role as a service centre in North Portugal are also credit- positive. The Positive Outlook reflects that on Portugal's ratings.

Solid Budgetary Performance
Porto has maintained a high operating margin in a difficult economic environment, at above 17% since 2009. This, coupled with flexibility on capital expenditure, has allowed the city to report a surplus before debt variation every year over the same period, except in 2010 due to an unexpected decline in capital transfers.

The city's 2014 accounts confirmed an operating margin of 23.2%, as tax collection improved on the back of a 60% increase in property transfer tax revenue. Operating expenditure continued to be streamlined, notably in personnel and current transfers, to 2012 levels (EUR120m). All in Porto reported a balance before debt variation (BBDV) of EUR28.3m or 10.3% of its total revenue for 2014, above the past three year's average of EUR9m.

The 2015 budget is based on a prudent operating revenue forecast, and discipline in managing spending, with the intention to further reduce debt to well below 55% of current revenue. The city's budget indicates a current balance of EUR15m, but the city has broadly outperformed its budgets since 2010 and Fitch expects the operating margin to remain in the 15%-20% range.

Decreasing Debt, No Contingent Risk
Porto reduced outstanding debt to EUR87.3m in 2014, or 56% of current revenue, from EUR97m in 2013. The city started deleveraging in 2009, when debt peaked at EUR121.5m and as a key infrastructure development phase, including the enlargement of the metropolitan transport and the renewal of the airport, came to a close. The administration expects no new debt in view of the city's adequate financial performance and liquidity, and the absence of investment projects to be funded by the council. There are also no contingent liabilities, and control over public sector entities is tight and was reinforced by the State Law 50/2012.

Prudent Management, Economy Recovering
Porto has a prudent financial policy and is constantly looking to improve its efficiency. It currently has 2,500 employees, down from over 3,500 in 2001. It also shows a satisfactory disclosure of information, including the annual financial results of all public bodies within its perimeter.

With an estimated population of 237,000in 2014, the City of Porto is the second-largest cultural, administrative and economic Portuguese centre, providing services to a greater metropolitan area that comprises 14 municipalities with 1.2m inhabitants. The city is increasingly attractive for tourism and the number of visitors doubled over 2009-2014, supported by renewed infrastructure and enhanced hospitality services. The city's key responsibilities are nursery and primary education; civil protection and police; housing and environmental protection; street lighting and urban equipment.

RATING SENSITIVITIES

Porto's intrinsic credit profile is well above the sovereign's and could benefit from a continued decline in debt. Conversely, it could suffer from a sharp deterioration of budgetary performance.

Porto's IDR ratings are constrained by the sovereign IDRs and are sensitive to changes of the sovereign rating