OREANDA-NEWS. September 15, 2015.  Fitch Ratings has affirmed the Polish City of Bydgoszcz's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and National Long-term rating at 'A(pol)'. The Outlooks are Positive.

The affirmation reflects Fitch's unchanged baseline scenario regarding Bydgoszcz's good operating performance, supported by strong financial management and a growing local economy.

KEY RATING DRIVERS
Fitch expects the city to maintain its good operating performance in the medium term, with an operating margin of 10% annually and operating balance covering debt service by 2x. This is based on the assumption that the city's management will retain control of operating spending, and that revenue from local taxes and fees will continue to grow, supported by the expansion of the city's tax base and the growing economy.

The city's local economy has benefited from improvements in local infrastructure. This stimulates business activity within the city and provides it with higher tax revenue. The unemployment rate in the city is on a declining trend, in July 2015 it was significantly below the national average, at 6.2% and 10.1%, respectively.

As a result of investments we expect a gradual increase in the city's direct debt. Fitch projects debt may grow to PLN1,320m in 2017 from a projected PLN1,150m at end-2015. However, it should not exceed a manageable 85% of the current revenue over the medium term. The debt to current balance ratio should remain safely below 10 years. When the city sell its stakes in heating company, KPEC, the proceeds could be used for capex financing and limit debt borrowing needs in medium term.

Fitch assumes that city's capex will not be lower than PLN300m annually in 2015-2017 and similar to previous years, the city will apply for EU funds to co-finance its capex. The rest of capex financing may come from new debt and city's own sources. The city's investments are focused mainly on infrastructure projects including construction of tram line, new roads. Fitch assumes that capital expenditure may account for at least 17% of total expenditure in 2015-2017, in line with the average spending of the past five years.

Fitch expects the city's indirect risk to grow as a result of debt-financed investments by its municipal companies, including the tramline and the construction of the incineration plant. We expect indirect risk to grow to PLN700m-800m in 2015-2016, and then decline in line with scheduled redemption. In our opinion, indirect risk does not constitute a major risk for the city's budget as most of these companies are self-supported.

RATING SENSITIVITIES
The ratings could be upgraded if the city maintains its sound operating performance reflected by an operating balance sustainably above 10% of operating revenue with a debt to current balance below 10 years.

KEY ASSUMPTIONS
Fitch assumes the investment programme will not be significantly extended leading to an increase in the city's demand for new debt.

Fitch also assumes that the city will comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU.

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