OREANDA-NEWS. December 08, 2015. Fitch Ratings has affirmed the Romanian City of Oradea's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and Short-term foreign currency IDR at 'F3'. The Outlooks on the Long-term IDRs are Stable.

The affirmation reflects Oradea's robust financial performance including sustainable own tax revenues stemming from good progress of the local economy and improving collection rates. Like all other local governments in Romania, Oradea operates in a supportive regulatory framework. The ratings take also into account its ambitious investment plans, which led to an increase of debt in 2015 and may require a further debt increase in 2016-2017. The Stable Outlook reflects Fitch's view that Oradea will comply with its statutory debt servicing limits and that debt metrics will remain in line with the rating.

KEY RATING DRIVERS
According to 3Q15 results, Oradea is likely to achieve at least the 2014 results when the operating margin increased to 27.4% and 84% of its investments were covered by the current margin. In Fitch's view, Oradea's operating performance may end up above 30% in 2015, driven by high tax proceeds and current transfers received already above the 2015 budget and those of 2014.This should help to keep the capital expenditure financing and debt ratios in line with pre-year results.

Oradea is continuing its ambitious investment plan. The city initially expected to reach an historical high in 2015, which could have resulted in an increase in debt to about RON359m or 76% of current revenue (2014: RON301m, 70%). In 3Q15, about RON237m of the RON682m had been realised and direct debt was RON347m. Fitch expects the city to maintain sound debt coverage ratios, well in line with its rated peer group as well as its statutory debt limit, at least in 2015-2016. At end-September 2015, Oradea held almost RON60m of cash on its treasury accounts supporting immediate liquidity need.

In 3Q15, direct debt was RON347m, corresponding to 81% of current revenue but its payback was below two years. Based on debt contracted but not entirely drawn and the city's investment plan, debt may further increase to about RON365m in 2016. Considering the medium-term financial plan, projects pending and co-funding from Oradea required, Fitch assumes debt will also slightly increase in 2017. Oradea has no guarantees outstanding but risk stemming from municipal companies was RON373m in 2014. According to the city, its risk on Electrocentrale is limited to RON30.7m (equity capital).

Oradea operates within a conservative regulatory framework with statutory debt limits. Although debt is assumed to increase through the medium-term financial plan until 2018, it will remain below the statutory limit (30% of the last three years' average of own revenues), according to the city (currently: 27.1%).

Fitch expects real GDP growth of 3.7% in 2015 for Romania. This should sustain the city's transfers, largely from redistributed VAT, which is collected by the government and transferred to local governments.

As the capital city of Bihor County, Oradea benefits from its proximity to the Hungarian border and having successfully established an industrial park, the city is attractive to investors and for working purposes. Its unemployment rate is below that of Romania (2015: 6.4%) and its wealth level above the national average.

RATING SENSITIVITIES
Positive rating action would be triggered by an operating margin consistently above 20%, and debt service and debt payback ratios not exceeding 50% of the operating balance and seven years respectively, associated with a reduction in debt-funded investments. However, an upgrade of the foreign currency IDR would rely on an upgrade of the sovereign's foreign currency IDR, as local and regional governments' ratings cannot be above the sovereign's.

Negative rating action could be triggered by a weaker operating performance than Fitch's expectations resulting in reduced coverage of capital expenditure and a concurrent deterioration in debt and debt service ratios. Further, negative rating action on the sovereign's ratings would trigger negative rating action on Oradea.

KEY ASSUMPTIONS
- Stable regulatory framework.
- Economic progress in line with Fitch's forecasts.
- Realisation of the city's scheduled improvements of operating revenues and cost-cutting efforts.
Implementation of EU projects does not result in co-funding requirements beyond the city's schedule.