OREANDA-NEWS. Fitch Ratings has affirmed Poland-based Zaklad Komunikacji Miejskiej w Gdansku Sp. z o.o.'s (ZKM) Long-term local currency Issuer Default Rating (IDR) at 'BBB' and its National Long-term rating at 'A+(pol)'. The Outlooks are Stable.

Fitch has also affirmed ZKM's PLN220m tram and PLN60m bus revenue bond programmes and their bonds' Long-term local currency ratings at 'BBB+' and National Long-term ratings at 'AA-(pol)'.

KEY RATING DRIVERS
In Fitch's view, ZKM's and its revenue bond programmes' links with the city remain strong. Based on the top-down approach under our public-sector entities rating criteria, the ratings of the revenue bond programmes and ZKM are one and two notches lower than the ratings of the City of Gdansk (A-/Stable; AA(pol)/Stable), respectively.

The one-notch differential between the revenue bond programmes and the City of Gdansk's ratings reflects the lack of an explicit guarantee for the bond programmes issued by the city. However, a support agreement links their ratings to those of the city.

ZKM's ratings are two notches lower than the city to reflect the lower legal protection of non-bondholders compared with revenue bondholders. The bondholders have a first claim on revenues in the tram and bus venture accounts (VA) for an amount equal to the next 12 months of bond service obligations. This provides preferential treatment as far as the timeliness of repayment is concerned. In addition, the bondholders have a pledge on venture assets, excluding them from the bankruptcy estate, which in case of liquidation subordinates non-bondholders.

The multi-year contract for bus and tram transport services between the city and ZKM provides the company with over 90% of its total revenue. The contract complies with EU resolution 1370/2007 and the remuneration for transport service paid by the city covers all ZKM's costs and ensures a reasonable profit for the company. Fitch does not expect any negative changes to the company's business model and to the financing of ZKM under the contract, and assumes stable and predictable inflows for ZKM in the long term.

Annual inflows to the VA significantly exceed annual obligations to revenue bond holders and Fitch expects the VA's liquidity to remain high. Cash paid into the tram VA was PLN59.8m in 1H15, while obligations to its bond were PLN17.5m. For buses, these figures were PLN63.4m and PLN12.0m, respectively.

Fitch expects the leverage ratios to continue to improve in line with the rise in EBITDA and the bond redemption in progress. At end-2014 gross debt was 207% of equity or 5.8x EBITDA (2013: 238% and 6.3x). At end-1H15 ZKM's debt was PLN195m and comprised entirely revenue bonds (tram PLN183.6m; bus PLN11.4m) and debt service coverage (DSCR) was 2.72x, above the contract covenant of 1.1x.

RATING SENSITIVITIES
ZKM's ratings could be downgraded if the links between ZKM and the City of Gdansk weaken. A downgrade of Gdansk's ratings could also impact ZKM. The revenue bonds may be downgraded if their status in the capital structure weakens or if the VA's liquidity deteriorates.

ZKM and its revenue bonds may be upgraded if the City of Gdansk's ratings are upgraded, assuming ZKM's and its revenue bond programmes' links with the city remain as strong, or if the programmes benefit from an explicit guarantee by the city.