OREANDA-NEWS. January 20, 2016. Fitch Ratings has affirmed the Polish City of Szczecin's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and its Short-term foreign currency IDR at 'F2'. Fitch also affirmed Szczecin's National Long-Term rating at 'AA-(pol)' with a Stable Outlook and National Short-term rating at 'F2'(pol).

The affirmation reflects Fitch's unchanged baseline scenario that Szczecin will maintain its good operating performance in the medium term. The ratings also reflect the city's prudent financial management, rationalisation of operating spending, healthy debt ratios and moderate debt levels.

KEY RATING DRIVERS
The 'BBB+' IDR reflects Fitch expectation that in medium term the city will maintain its good operating performance, with an operating margin of 12%-13% annually and expected operating balance 2x higher than annual debt service (instalments with interests). This is based on the assumption that the city's management will continue to control operating spending, and that revenue from local taxes and fees will continue to grow, supported by the expansion of the city's tax base and the growing economy.

Fitch expects direct debt to remain at a moderate level below 65% of current revenue in the medium term. The city's debt-to-current balance ratio should remain satisfactory at around six years (2015: 4.6 years). Fitch assumes that Szczecin will continue its investment-driven approach and similar to previous years, will apply for EU funds to co-finance its capex. The rest of capex financing may come from new debt and city's own sources.

In 2015 city's direct debt grew to PLN1.065m from PLN913m in 2014 following the peak of investment at PLN720m as a result of final payments for recently finished investments, which were mainly EU co-financed. In the medium term, we expect capital expenditure at around PLN450m annually on average or around 20% of total expenditure.

Fitch considers the city's management practices a supportive rating factor. This includes maintenance of financial discipline and accumulation of funds for capex financing as well as efficient cost control in the educational sector and social care and administration. We also view positively the city's debt policy, which consists of incurring long-term low cost funding from international financial institutions, securing smooth debt repayments and a liquidity buffer to offset the FX and float interest rates risk.

RATING SENSITIVITIES
Szczecin's ratings could be upgraded if the city strengthens its operating performance on a sustained basis, with an operating margin above 12% accompanied by stabilising direct debt following containment of capex in the medium term.

A downgrade could result from a weakening of the city's operating margin to below 7%, accompanied by debt above 80% of current revenue, resulting in significant deterioration in the debt-to-current balance ratio to beyond 10 years.

KEY ASSUMPTIONS
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.

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