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Fitch Affirms Polish City of Torun at 'BBB'; Outlook Stable.

Warsaw/London: Fitch Ratings has affirmed the Polish City of Torun's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB' and National Long-Term Rating at 'A+(pol)'. The Outlooks are Stable.

The affirmation reflects Fitch's unchanged base case scenario of the city's healthy budgetary performance, supported by sound financial and strategic management. The ratings also incorporate the city's fairly high net overall risk following large investments.

KEY RATING DRIVERS

Torun's overall budgetary performance in the year to date has been in line with Fitch's base case scenario. We expect Torun to maintain its satisfactory operating results over the medium term with an operating balance of around PLN100 million or 1.3x its annual debt-service obligations, including interest and principal. The debt-to-current balance ratio (payback ratio) should remain at 11 to 12 years; well below its final debt maturity of 25 years.

For 8M17 Torun posted a budgetary surplus of PLN84 million, compared with the city's large budgeted deficit of PLN102 million or 9% of total revenue for the whole of 2017. The surplus stems from slower-than-expected EU-funded capex programme launches. We expect that a significant part of those investments will be carried forward to 2018, so that actual capex for 2017 may be 60% of the budgeted amount. As a result we expect a deficit of around 3% of total revenue in 2017 (PLN33 million).

For end-2017 Fitch expects direct debt of PLN888 million or 90% of current revenue (2016: PLN890 million and 94%). As investments accelerate from 2018, we expect Torun's direct debt to grow gradually in nominal terms. Capex will increase to PLN250 million per year in 2018-2019 and will mostly be financed from capital revenue (mainly EU grants) and the current balance, but some new debt is also likely to be incurred. However, Fitch expects direct debt to remain stable at around 90% of current revenue in the medium term as continuing revenue growth should compensate expected debt increase.

Torun's ambitious investments in the past have resulted in fairly high indebtedness. At end-2016 the city's net overall risk (direct debt and indirect risk) was high at 125% of current revenue. Torun's authorities have shifted some large-scale infrastructure improvement works to the city's municipal companies, which they are financing with debt and EU grants. Torun provides capital support to its public sector entities (PSE) of PLN35 million annually, which is included in the city's multi-year financial plan. We expect PSE debt to gradually decline in line with their redemption schedule.

As with many other Polish subnationals, Torun faces pressure on operating expenditure. Most of the operating expenditure pressure arises from under-funded responsibilities that were transferred to local governments by the state in the past and from the dominance of rigid spending items such as education and social care.

In 2017-2018 growth of operating expenditure may outpace that of revenue due to rising pressure on spending, especially on education (due to a reform launched by the state government in all Polish municipalities), and salaries. Upcoming local elections in 2018 mean Polish cities are unlikely to cut rigid operating expenditure during the next two years.

The ratings are supported by the city administration's prudent financial and strategic management, particularly in long-term financial projections and close monitoring of both market conditions and budgetary implementation. We also view positively the city's debt policy of contracting long-term, low-cost funding from international financial institutions, of smoothing debt repayments and of maintaining sufficient coverage of annual debt obligations by current balance.

Torun is a medium-sized Polish city with around 190.000 inhabitants. GRP per capita in the Bydgosko-Torunski sub-region, where the city is located, was 104% of the national average in 2015. The city's economy is diversified, with services playing an important role. Torun is a cultural and higher education centre with about 40,000 students, ensuring a highly qualified labour force. It is an attractive tourist destination and receives around two million visitors every year, as its old town is a UNESCO World Heritage site.

RATING SENSITIVITIES

The ratings could be upgraded if Torun reduces its net overall risk below 100% of current revenue, while maintaining sound operating performance as reflected in a debt payback ratio of below 10 years.

The ratings could be downgraded if Torun's net overall risk exceeds 150% of current revenue or if the city's operating balance becomes insufficient to cover debt service (principal and interest) on a sustained basis.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 6, 2018
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