OREANDA-NEWS. January 26, 2016. Fitch Ratings has affirmed the Polish Region of Wielkopolska's Long-term foreign currency Issuer Default Rating (IDR) at 'A-', Long-term local currency IDR at 'A' and National Long-term rating at 'AA+(pol)'. The Outlooks are Stable. Fitch has also affirmed the region's Short-term foreign currency IDR at 'F2'.

The affirmation is based on Fitch's unchanged baseline scenario regarding the region's sound operating performance and its moderate debt levels.

KEY RATING DRIVERS
The 'A-' IDR reflects our expectations that Wielkopolska will maintain a strong operating performance in the medium term, which together with solid strategic and financial management supports healthy debt service and debt payback ratios.

In 2015, according to the regional authorities, the operating margin was high at 24.2% (similar to that posted in 2014), which is above our expectations. This result was supported by among other things, higher than budgeted tax revenue, especially from corporate income tax, as well as the authorities' continued effective measures to contain opex growth.

Fitch expects Wielkopolska to continue to demonstrate solid operating performance in 2016-2017. In our base case scenario, we estimate an operating margin of around 17%, which is below the region's historical average, as we envisage higher operating spending growth pressure in the medium term, mainly due to inspection repairs of the region's own rolling stock, as well as planned soft projects under the 2014-2020 EU budget. However, should the authorities continue to effectively exercise their flexibility to limit opex growth and the expected growth of the national economy supports higher revenue inflow from income taxes, Wielkopolska's actual operating results may be above our expectations.

Fitch expects Wielkopolska's capital expenditure to remain high in 2016-2017 at PLN300m per year or 30% of total expenditure. Thanks to possible EU financing, the region's capital revenue should also be high, averaging about PLN150m annually in 2016-2017. Coupled with the projected operating balance, this should limit Wielkopolska's recourse to debt in the medium term.

Fitch's base case scenario expects Wielkopolska's direct debt for 2016-2017 will remain moderate, at about 55% of current revenue. At end-2015, the region's direct debt was PLN462.5m, or 51% of current revenue (2014: PLN502.5m and 52%). Debt servicing (principal and interest) in 2016-2017 will be around 37% of the operating balance, while the debt-to-current balance, although deteriorating to about three to four years from 2.2 years in 2015, will still remain well below the region's final debt maturity (12 years).

RATING SENSITIVITIES
An upgrade of the Polish sovereign rating, accompanied by a continuation of the region's sound operating performance could lead to an upgrade of Wielkopolska. Conversely, sustained deterioration in the operating margin, or a significant rise in Wielkopolska's direct debt, resulting in weak debt payback of above nine years could trigger a downgrade.

KEY ASSUMPTIONS
Fitch expects the region to continue its efficient operating expenditure growth control and to manage the budget prudently in the medium term.

Fitch assumes that the region will continue to receive EU funds to co-finance its investment programme.

Fitch also assumes that the region will continue to comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU. Otherwise, Wielkopolska will face the penalty of having to return previously received EU grants.