OREANDA-NEWS. Fitch Ratings has revised the City of Porto's Outlook to Stable from Positive while affirming the city's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+'. The Short-term foreign currency IDR has been affirmed at 'B'.

KEY RATING DRIVERS
The change in the Outlook of Porto's IDR reflects the following key rating drivers and their relative weights:

HIGH
The change of Outlook reflects a similar rating action on Portugal's Outlook to Stable from Positive (see Fitch Revises Portugal's Outlook to Stable; Affirms at 'BB+' dated 4 March 2016 at www.fitchratings.com).

Porto's ratings remain constrained by the Portuguese sovereign (BB+/Stable), in accordance with Fitch's criteria. As with other Portuguese cities, Porto's accounts and budgets are overseen by the central government and its financial liabilities are approved by the national Court of Accounts. The limited role of the intermediate tiers of government (province and region) in Portugal strengthens the link between the central government and cities.

Porto's intrinsic credit profile is stronger than its ratings indicate, due to the city's healthy budgetary performance, its moderate debt as well as the strong oversight by the central government. Prudent management and Porto's role as a service centre in north Portugal are also credit- positive.

Porto's 'BB+' IDRs also reflect the following key rating drivers:

Porto has maintained a high operating margin in a difficult economic environment, at above 17% since 2009. This, coupled with flexibility on capital expenditure, has allowed the city to report a surplus before debt variation every year over the same period. The 2015 preliminary accounts confirm a consistent performance with an expected operating margin exceeding 20%, due to the strengthening of taxes and fees revenue over the year.

The 2016 budget is based on a prudent operating revenue forecast, and discipline in managing spending, with the intention to further reduce debt below 45% of current revenue. It includes extraordinary financial revenues coming from concessions contracts, as well as a high allocation from EU capital transfers as the city was particularly active in applying for such funds in 2015, aimed mostly at refurbishing projects. Porto's budget indicates a current balance of EUR25m, but the city has broadly outperformed its budgets since 2010 and Fitch expects the operating margin to remain above 15%.

Porto reduced outstanding debt to EUR87.3m in 2014, or 53.5% of current revenue, from EUR97m in 2013, and decreased to close to EUR80m at end-2015, according to preliminary accounts. The city started deleveraging in 2009, when debt peaked at EUR121.5m and as a key infrastructure development phase, including the enlargement of the metropolitan transport and the renewal of the airport, came to a close. The administration expects no new debt in view of the city's adequate financial performance and liquidity, aside of the building refurbishing programme started in 2014. Porto has no contingent liabilities, and control over public sector entities is tight and was reinforced by the State Law 50/2012.

Porto has a prudent financial policy and is constantly looking to improve its efficiency, having contained its operating expenditure after revenue collection fell during the economic downturn. It currently has around 2,800 employees, down from over 3,500 in 2001. Disclosure of information is satisfactory and precise, including the annual financial results of all public bodies within its perimeter.

With an estimated population of 237,000 in 2014, the City of Porto is the second-largest cultural, administrative and economic Portuguese centre, providing services to a greater metropolitan area of 14 municipalities with 1.2 million inhabitants. After a severe economic recession, GDP resumed growth in 2014, and is expected grow moderately over the next two years.

RATING SENSITIVITIES
Porto's intrinsic credit profile is well above the sovereign's and could benefit from a continued decline in debt. However, Porto's IDR ratings are constrained by the sovereign IDRs and are sensitive to changes of the sovereign rating.