OREANDA-NEWS. Fitch Ratings has affirmed Polish City of Kielce's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and its National Long-term rating at 'A-(pol)'. All ratings are on Positive Outlook.

The affirmation reflects Fitch's unchanged base case scenario of the city's satisfactory operating performance and sound debt ratios, supported by robust management practices and a growing national economy.

KEY RATING DRIVERS
The city's operating results have been improving since 2010, a trend which Fitch expects to continue for 2015-2017. We project an operating margin averaging 7%-8%, compared with 5% in 2010. This will cover debt- service obligations by 1.7x-2x and support a debt-to-current balance of 10-11 years.

We have based our base case scenario on the assumption that the local authorities will keep operating spending increase below operating revenue growth as they have done in the past. Additionally national economic growth should support the city's economic development and positively impact its tax revenue.

Fitch forecasts Kielce's direct debt to remain moderate in 2015-2017, at 65%-70% of current revenue, given its smaller debt appetite than most of its peers. We expect the city's annual capex to decline to around 10% of total expenditure, after a high expected PLN300m for 2015. Higher capex for 2015 is a result of spending postponed from 2014 and final payments for investments co-financed from the 2007-2013 EU budget.

Rolling out investments co-financed by grants from the new 2014-2020 EU budget may take time. The next peak of capital spending is likely to come in 2018-2020, but we assume that the majority will be financed by capital revenue (including EU funding) and the current balance, limiting the city's debt financing needs. The city's goal is to exploit funds available for Polish local governments under the 2014-2020 EU budget, from which they may apply to up to 85% of co-financing.

Fitch considers the city's management practices a supportive rating factor. To limit the growth of more rigid expenditure, the city's authorities are closely monitoring spending on employment, organising collective tenders for utilities and modernising public buildings. These measures should allow Kielce to keep operating spending increase below operating revenue growth over the medium term.

Fitch projects that Poland's real GDP to grow 3.5% per annum in 2015-2017. In addition, the local economy will benefit from an improving local infrastructure, which should stimulate business activity within the city and provide it with a stronger tax base and hence higher tax revenue.

RATING SENSITIVITIES
An upgrade may result from the city maintaining its operating performance in line with 2013-2014 results, and a debt-to-current balance ratio of below 12 years.

KEY ASSUMPTIONS
Fitch assumes that operating expenditure does not grow faster than operating revenue that leads to deterioration of the operating margin.

Fitch assumes the investment programme will not be significantly extended that leads to an increase in 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.