OREANDA-NEWS. November 30, 2015.  Fitch Ratings has affirmed the Polish City of Zabrze's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and National Long-term rating at 'BBB+(pol)'. The Outlooks are Stable.

The affirmation reflects our unchanged view that Zabrze's operating performance will remain sufficient for full debt servicing in the medium term.

KEY RATING DRIVERS
The 'BB+' rating reflect the operating balance covering the debt service and the moderate, albeit expected to increase, net overall risk and the still weak liquidity.

We project the city's operating margin will be 7%-8% in 2016-2017 and the operating balance covering debt service by at least 1.3x (2014: 1.5x). For 2015, we expect the operating margin to deteriorate below 7% (2014: 7.7%) due to the unforeseen increase of operating expenditure that will not be compensated by higher tax revenues and transfers received. A weaker current balance and the negative capital balance due to large investments will lead to a historically high budgetary deficit of 12% of total revenue in 2015, to be mainly debt covered.

We expect that Zabrze's direct debt may remain at a still moderate level of 50%-60% of current revenue in 2015-2017 although it will grow above the 2010-2014 average of 42% of current revenue. Nominally direct debt may rise by 20% to PLN410m in 2015 to cover the high budgetary deficit expected in 2015. Further debt increases are unlikely due to our projected balanced budgets in 2016-2017 and debt limit constraints.

The city decided to pre-finance EU grants of PLN10m in 2015. The grants' receipt has been postponed to 2016 but the investment spending will be made in 2015. The bonds should be repaid in full from the EU grants received and should not pose a burden for Zabrze's budget. To finance investments under the EU budget for 2014-2020, the city decided to rely more on advance payments from the EU instead of refinancing as it did previously. This should improve the city's still weak liquidity.

Zabrze's indirect risk, eg. the debt of municipal companies and guarantees issued by the city will peak at PLN310m at end-2016 from PLN206m at end-2014. Thereafter it should stabilise according to our projections. The already high indirect risk to direct debt ratio of 60% in 2014 will increase to about 80% in 2016-2017. The increase results from the financing of the reconstruction of the city's football stadium by Stadion w Zabrzu Sp. z o.o. and from the bonds issued by the football company Gornik Zabrze, guaranteed by the city.

Zabrze's payments relating to the stadium project could increase to about PLN30m annually in 2016-2017, up from PLN24m in 2015 due to the extension of construction works. We assume that for the football club the city will spend (equity injections and guarantee payments) about PLN13m annually in 2016-2017 to assist the financially very weak company. This means that about 33% of the projected city's capex in 2016-2017 will be spent for those shareholdings, reducing the city's capex finance flexibility.

RATING SENSITIVITIES
An improvement of Zabrze's operating performance on a sustained basis with operating margins at 8%-9% coupled with net overall risk stabilisation below 100% of current revenue (2014: 91% and for 2015 expected 109%) would lead to an upgrade.

The ratings could be downgraded if the operating margin falls below 2%, leading to a debt payback ratio exceeding 20 years and/or net overall risk growth significantly above 100% of current revenue.

KEY RATING ASSUMPTIONS
Fitch assumes an unchanged time and cost schedule for the city's and its companies investments in 2015.