OREANDA-NEWS. December 16, 2015. Fitch Ratings has affirmed the Polish City of Plock's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and Long-term National rating at 'A+(pol)'. The Outlooks are Stable. Fitch has also affirmed Plock's PLN58m and PLN86.9m senior unsecured bonds' Long-term local currency rating at 'BBB' and National Long-term rating at 'A+(pol)'.

The affirmation reflects that the city continues to benefit from a wealthy tax base, which provides it with high tax revenue, satisfactory operating performance, and currently moderate debt burden. The Outlook is Stable despite the expected gradual debt increase as a result of investments that will be partially co-funded by EU.

KEY RATING DRIVERS
The 'BBB' IDR reflects satisfactory operating performance, in part due to volatility of corporate income tax revenue. The city has been reporting a fragile operating margin in the 4% to 12% range. Fitch considers that stricter control over operating spending will help Plock's operating performance to stabilise in 2016-2018 with the operating margin at 8% on avarage. National economic growth, projected by Fitch at 3.5% annually in 2016-2017 should also support the local economy's development and positively impact the city's tax revenue.

Operating revenue is strongly linked to the local economy, which in turn is linked to the petrochemical sector. Petrochemical companies with their large property estate supports high property tax revenue (28% of operating revenue), high personal income tax (20% of operating revenue) and supports high corporate tax revenue.

Fitch expects the city's direct debt to grow in 2016-2018 as a result of investment but it should not exceed 75% of current revenue (69% expected in 2015). Despite growth, the debt-to-current balance ratio should remain at 11 years in line with weighted final debt maturity. The city's management goal in the medium term is to increase the share of own revenue in capex financing instead of incurring new debt.

In its revised multiyear financial plan, the city assumed capital spending at PLN186m annually in 2016-2018. We project that around 50% of capex financing may come from capital revenue, mainly EU grants as the rest may come from new debt and the city's own sources.

The city authorities' policy in the following four years is to incur long-term debt with 10-15-year repayment period. All Plock's outstanding debt is indexed to floating interest rates, which exposes the city to interest rate risk. Debt is fully PLN-denominated, so the city is not exposed to FX risk.The debt amortisation profile is smooth and spread until 2030. We expect this policy to continue in the medium term.

RATING SENSITIVITIES
The ratings could be upgraded if the city improves its operating margin to above 12% on a sustainable basis and debt stabilisation below 65% of current revenue.

The ratings could be downgraded if the city's operating margin deteriorates below 6% on a sustainable basis and the operating balance is insufficient to meet debt service obligations.