Fitch Rts Municipality of Metropolitan Istanbul, Turkey `BB-'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 13, 2000

Fitch has assigned a 'BB-' foreign currency rating to the Municipality of Metropolitan Istanbul (municipality). The Rating Outlook is Stable. The rating is supported by: Istanbul's size and role as the business capital city of Turkey; a strong socio-economic profile by Turkish standards; an improving fiscal position and budget flexibility; and manageable debt levels. However, the rating also considers the potential impact of decentralization in Turkey on municipal finances; and country risk.

On a budgetary basis, the municipality generated primary surpluses every year since 1993, and is expected to generate an additional surplus of approximately U.S. $500 million in 1999, pending final results. Operating revenues consist of national tax contributions, municipal tax revenues and fees for services. Funds received under national tax sources (revenue sharing) are net of foreign debt service and other obligations owed by the municipality. Approximately 94 cents out of every dollar of Istanbul's operating revenues is derived from federal sources.

Istanbul's expenditures consist of operating (42 percent) and capital (58 percent). Investments in public works, primarily the mass transit system, consumed approximately two-thirds of the capital expenditures, and put pressure on Istanbul's fiscal equilibrium, not the operating budget. Istanbul's expenditures can further be categorized as mandatory and discretionary. As provided by law, mandatory expenditures include wages and salaries to municipal employees, administrative overheads and debt service. Discretionary expenditures refer to items that are above and beyond mandatory spending requirements. Of the municipality's total expenditures, approximately 71 percent were discretionary.

A large discretionary expenditure budget affords Istanbul some flexibility. The municipality has the ability to decree reductions in the expenditure budget as economic conditions warrant and as revenue volumes fall. In 1999, a recessionary year, discretionary capital expenditures decreased 53 percent of their budgeted level, while overall total expenditures were 23 percent less than budgeted in 1999. Furthermore, Istanbul is obligated to maintain a minimum of 5 percent of its annual revenues in a 'spare fund' (budgetary cushion) to cover potential increases in project costs during the year.

Istanbul's total consolidated debt (U.S. $441 million) remains manageable and consists primarily of debt issued by the central administration ($184 million) and three municipal companies (U.S. $257 million). On a budgetary basis, 1999's operating result before interest expense represented 9.7 times central administration debt service. Additionally, 1999's debt service claimed only 4.2 percent of the expenditure budget, pending final results. Istanbul's debt is exposed both to currency and interest rate risks.

The 'BB-' rating also considers Istanbul's relationship with a number of enterprises providing essential services to local residents, including a gas utility (IGDAS), the seabus ferry service company (IDO) and the metro system (ULASIM). As municipal companies, these entities may receive various forms of financial support from Istanbul's central administration. However, their debts are ostensibly self-funded. Istanbul's creditworthiness is also influenced by Turkey's economy, legal framework and political environment. Fitch upgraded Turkey's sovereign rating from 'B+' to 'BB-' with a stable outlook in April 2000.

Formally settled in 660 B.C. under the name of Byzantion, Istanbul was annexed to the Ottoman Empire in 1453. Today Istanbul is the largest city in Turkey and the world's 25th largest metropolitan area. Istanbul's well-diversified economy comprises manufacturing, transport and trade, financial services and public services and contributes approximately 38 percent of total national tax revenues. Istanbul's residents are generally better educated and earn almost 50 percent more than the national average. The current administration was reelected in 1999 for a second consecutive five-year term, and holds a strong majority in the municipal council in the form of an unofficial coalition.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for financial institutions, insurance, corporates, structured finance, sovereigns and public finance markets worldwide.