OREANDA-NEWS. Fitch Ratings has upgraded the Polish City of Bydgoszcz Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB+' from 'BBB'. Fitch has also upgraded the National Long-term rating to 'A+(pol)' from 'A(pol)'. The Outlooks are Stable.

The upgrade reflects Bydgoszcz's improved operating performance, supported by strong financial management and a growing local economy. The ratings also incorporate moderate debt and safe debt payback ratio. The Stable Outlook reflects Fitch's expectations that the city will demonstrate sound operating performance in the medium term.

KEY RATING DRIVERS
The upgrade reflects the following key rating drivers and their relative weights:

HIGH
Fitch expects the city to maintain its good operating performance in the medium term, with an operating margin of 11% annually and an operating balance 2.5x-3.0x higher than annual debt service. This is based on the assumption that the city's management will retain control of 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 considers the city's management practices a supportive rating factor. The city's management implemented operating spending rationalisation as well as actions aimed at increasing the city's revenue. The city's authorities are focused on creating good conditions for business development in the city, attracting new investors and improving local infrastructure. Bydgoszcz's robust management enabled the city to achieve a sound operating margin of 11% in 2015 (2014: 9.5%).

The city's policy is to finance heavy infrastructure investments from EU funds received under the new programming period for 2014-2020 and also increasingly from the current balance. Fitch assumes that capital expenditure may account for at least 17% of total expenditure in 2016-2018.

MEDIUM
Bydgoszcz is a large city in the national context with around 358.000 inhabitants. The GRP per capita in the Bydgosko-Torunski sub-region, where the city is located was 103.9% of the national average in 2013. Bydgoszcz's economy is diversified, with services playing an important role. The local economy has benefited from improvements in local infrastructure. This stimulates business activity within the city and provides it with higher tax revenue. The unemployment rate in the city is on a declining trend. At end-2015 it was at 5.4%, significantly below the national average of 9.8%.

Bydgoszcz's ratings also reflect the following key rating drivers:

Fitch expects moderate debt growth in the medium term as a result of investments. However, direct debt should not exceed a manageable 80% of current revenue. In 2016-2018, we assume the city's direct debt will grow by PLN65m annually on average to PLN1,300m at end-2018 from PLN1,089m at end-2015 (72% of current revenue). The debt to current balance ratio should remain safe at around eight years.

The debt of municipal companies peaked at PLN850m in 2015 from PLN654m at end-2014 following their debt-financed investments. In the medium term, we expect indirect risk to decline in line with scheduled debt redemption and the refund of EU grants for already completed investments. In Fitch's view, indirect risk does not constitute a major risk for the city's budget as most of these companies are self-supported and repay their debt from their revenues.

RATING SENSITIVITIES
The ratings could be upgraded if the city further improves its operating performance, as reflected by an operating margin sustainably above 13% and direct debt reduction towards 60% current revenue.

The ratings could be downgraded if the city's operating margin deteriorates to its 2013-2014 level accompanied by debt above 90% 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 based its projections on the currently binding legal framework for Polish local governments, especially revenue and expenditure allocation.