OREANDA-NEWS. December 08, 2015. Fitch Ratings has upgraded the Metropolitan Municipality of Bursa's (Bursa) Long-term foreign currency and local currency Issuer Default Ratings (IDR) to ' BB+' from 'BB' and the National Long-Term Rating to 'AA(tur)' from 'AA-(tur)'. The Outlooks are Stable.

KEY RATING DRIVERS
The upgrade reflects Bursa's expected sustainable overall risk reduction, city's commitment to reduce its unhedged FX exposure, and continued expenditure discipline coupled with strong operating performance, and wealthy economy which together with high capital revenue, supports a high self-financing capacity for its ongoing large capex investments envisaged for 2016-2018. The upgrade takes into account direct risk to current balance to remain under three years, despite the FX risk the city is exposed to and its large capex investments.

The Stable Outlook reflects Fitch's expectations that operating performance to remain strong and debt metrics should remain consistent with the current ratings.

HIGH
Fitch projects Bursa to reduce its direct debt on a sustainable basis to 100% of its current revenue, with debt to current revenue ratio decreasing below three years for the first time since 2006, during the period of 2016-2018. This will be supported by the city's continued expenditure discipline track record since the last three years and improving debt management practices.

The agency expects direct debt to increase to TRY1.5bn in 2018, due to its financing needs for its ongoing capex investments. However, this will be supported by the city's continued strong operating surpluses, and solid financial management, keeping the debt payback ratio below three years.

Further, the city is exposed to unhedged FX risk, which is related to its project financing and denominated all in euros. In 2014, the share of its FX exposure was 59.5%. Since 2013 the city has not taken on any new foreign - currency denominated debt and envisaged in its three year planning not to take further. Accordingly, Fitch expects, FX share to come below 50% of its debt portfolio as of 2018. The weighted average of maturity of its FX debt is at 12 years, and its total debt is at 10 years as of 3Q15, well above its debt payback ratio.

The lenders of Bursa's FX debt portfolio consists of solely multilateral agencies, such as EIB, EBRD and KfW. For local currency borrowing the city has also good access to various commercial and state owned banks.

MEDIUM
In 3Q15, Bursa continued to post strong operating margin above 40 %, at 43. 5% ,which is supported by the operating expenditure growth substantially below the operating revenue and also reflects its investment driven responsibilities. The local economy was resilient against the adverse sentiment change in the international capital markets in 2014 and 2015. The city's tax revenue in 2014 grew by 18 % yoy on a nominal basis and is expected to increase by 20% as of end 2015.

The city authorities follow a solid budgetary policy and improving financial planning, which guarantees solid operating performance, albeit adjustments in improved liquidity planning could be undertaken. Sound financial planning enables further large financing needs of the capex investments to be covered in a timely and forward looking manner.

Bursa is Turkey's fourth largest contributor of its GVA, contributing on average 6% of the gross value added in 2004-2011 (last available statistics). The metropolitan city accounts for 3.6% of the Turkish population, which was 2.8 million people in 2014. The city is the main hub for the country's automobile and automotive industry, followed by steel production, textile and food-processing industries

RATING SENSITIVITIES
A sharp increase in overall debt and a deterioration of the deficit before financing to more than 10% of total revenues could also prompt a downgrade, although this is not Fitch's base case scenario.

Sustainable reduction of overall risk, and continuation of strong budgetary performance would be positive for the Long-term IDRs and National Ratings.