Fitch Affirms Romanian City of Bucharest at 'BBB-'; Outlook Stable
The affirmation reflects Bucharest's continuous strong operating performance and debt servicing ratios in line with the rating. The Stable Outlook reflects Fitch's expectations that Bucharest's budgetary performance will remain sound and the city's debt ratios will remain at least broadly in line with 2014's levels, after a slight increase in debt in 2015, when Fitch also assumes real GDP growth will have continued.
KEY RATING DRIVERS
The ratings reflect Bucharest's economic and financial centre functions due to its status as Romania's capital, with wealth far above the national average, and strong budgetary performance. They also reflect the high dependence of the city's operating revenues on the economic cycle, high investment needs and uncertainty over its contingent liabilities.
Direct risk increased slightly by RON180m to RON2,986m at end-2015, after considering partial repayments of existing loans and drawings for two new loans. Bucharest's debt is prudently managed and its debt service ratio (debt service/own revenues) of 7.43% at end-2015 was well below the statutory limit of 30%.
Considering 3Q15 figures, outstanding debt may be 2.8 years of the city's current balance and about 80% of current revenue (assuming the last quarter of 2015 remained consistent with the previous three quarters). Both ratios are in line with previous years' figures. Annual debt service was a low 5.7% of current revenue and is supported by the city's liquidity of RON271m in 3Q15.
At end-2015, Bucharest was exposed to about RON131m of debt service and guarantees on two wholly-owned companies and one minority shareholding. The independent heating distribution unit, Radet, a local entity with legal status under the authority of the Bucharest City Council, had liabilities of RON3.5bn to SC Electrocentrale Bucuresti SA at end-June 2015. These consisted of heating consumption bills, current penalties and penalties subject to a final court ruling.
According to published 3Q15 figures, Bucharest's operating margin was about 32% (2014: 29.5%), well in line with the five-year average of 29% and was more than adequate to pre-finance the city's investments realised at this time. The current balance covered the city's capital expenditure by 2x while the operating balance covered interest payment by at least 10x. Fitch assumes some further investments were realised in 4Q15 but that in line with previous years they were also covered by the city's strong current balance. The city's three-year financial plan forecasts that the operating margin will remain at around 30% until 2018.
Romania's GDP grew 3.3% in real terms in 2015 and Fitch expects this to further improve to 3.8% in 2016 before slowing slightly to 3.5% in 2017, well above the average of 1.4% reported in 2010-2014. Local wealth is more than 2x the national average and robust through economic cycles due to a well-diversified economy. A large proportion of employment results from the presence of public bodies in the national capital. This contributes to an unemployment rate of just 2% at end-2014, well below the national average of 5.1%.
RATING SENSITIVITIES
Bucharest's ratings are constrained by the sovereign's ratings. Maintaining its strong operating performance that ensures investments are largely funded by internal resources, together with debt below 100% of current revenue, would lead to an upgrade, provided the sovereign is also upgraded.
A significant increase in debt pressure due to deterioration of operating performance as well as recognition of contingent liabilities linked to the city's PSEs as direct debt would trigger a downgrade.
KEY ASSUMPTIONS
- Stable regulatory framework.
- Economic progress in line with Fitch's forecasts.
- Contingent liabilities in the form of penalty interest by Radet will not result in a large increase in debt for Bucharest.
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