OREANDA-NEWS. November 25, 2015. Fitch Ratings has affirmed the Polish City of Torun's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and its National Long-term rating at 'A(pol)'. The Outlooks are Stable.

The affirmation reflects Fitch's unchanged base case scenario that city will maintain its sound operating results in the medium term, supported by the city authorities' prudent financial management. The ratings also factor in Torun's fairly high direct and indirect risk following large investments.

KEY RATING DRIVERS
The 'BBB' IDR reflects Fitch expectation that in the medium term the city will continue its prudent financial and strategic management, particularly in long-term financial projections and close monitoring of both market conditions and budgetary execution. This approach will support what Fitch estimates to be a sound operating margin of 13% and an average prudent debt payback ratio of 11 years for 2015-2017.

The city's ambitious investment plan in the past has resulted in fairly high indebtedness. Investments were focused on improving the city's infrastructure, mainly roads and transport. We expect this investment-driven approach to continue over the medium term. As in the past, the city will apply for funds available for Polish local governments under the 2014-2020 EU budget to co-finance its capex, although this may take time. The next peak of capital spending is likely to be in 2018-2020.

At end-2015 we expect the debt-to-current revenue ratio to improve to 104% from 116% in 2014. In 2015, the city repaid PLN165m of an EIB loan, using surplus EU funds received for bridge construction. The early repayment will hit city's debt service ratio in 2015, which is expected to be 235%, but from 2016 this ratio should return to a safe level of around 80% of the operating balance. Fitch expects the city's direct debt to stabilise at around 100% of current revenue in the medium term.

Direct debt should not cause significant pressure for the budget, due to its long and smooth maturity profile, sound financial management and the city's commitment to maintaining the current balance at levels that are sufficient to meet annual debt obligations. Torun is exposed to interest rate risk as 98% of its debt is floating rate. However, Fitch believes risks should be manageable based on the city's prudent budgetary approach.

We expect indirect risk to grow to PLN455m in 2015, from PLN325m in 2014. Torun's authorities shifted some large-scale infrastructure improvement work to its municipal companies, easing pressure on the city's financing needs in 2013-2015. These companies financed investments with debt and EU grants. Torun provides capital support to its public service entities, which will receive PLN34m in 2015 and a further annual PLN35m-PLN40m, which has been included in the city's multiyear financial plan for 2016-2025.

RATING SENSITIVITIES
The ratings could be upgraded if the city reduces its direct and indirect debt below 100% of current revenue, while maintaining a sound operating performance, as reflected in an operating margin above 10%.

The ratings could be downgraded if the overall debt burden (direct and indirect risk) exceeds 150% of current revenue or its operating balance becomes insufficient to cover debt service (principal and interest) on a permanent basis.

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

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.