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Fitch Affirms City of Warsaw at 'AAA(pol)'; Outlook Stable

June 18, 2015
Fitch Ratings has affirmed the Polish City of Warsaw's National Long-term rating at 'AAA(pol)' with a Stable Outlook. Fitch has also affirmed the National Long-term rating of the city's PLN4bn bond programme and all bonds issued under it at 'AAA(pol)'.

The rating affirmation reflects Fitch's unchanged baseline scenario regarding the city's operating performance, and the city's high liquidity buffer supporting debt service. The ratings also take into account the city's wealthy and diversified economy, a strong tax base, and expected stabilisation of direct debt in 2015-2017. It also reflects growth of the city's indirect debt and pressure to increase operating spending.

Fitch expects the city to maintain its operating balance at about 7% of operating revenue, above the average of 6.1% from 2010-2014. This will be supported by the city authorities' continued cost control measures, higher-than-average flexibility to limit operating expenditure growth and expected growth of the national economy.

Warsaw's investments in 2015-2017 could total PLN6bn - on average 15% of annual total expenditure - similar to 2012-2014 levels, as the city prepares to roll out investments under the 2014-2020 EU budget. Over 70% of investment financing may come from the city's current balance, cash reserves and capital revenue, limiting the city's debt financing needs. This is provided Warsaw's administration continues to be successful in obtaining substantial EU grants to fund its investment programme.

The city's strong liquidity buffer is a positive rating factor. During 2014 the city had on average PLN1.6bn of free cash available on its accounts, which exceeded annual debt service by 1.4x. Fitch expects liquidity to be partially absorbed by capex in 2015-2017, but should remain above PLN700m.

Fitch base case scenario expects Warsaw's direct debt for 2015-2017 to remain moderate, at about 50% of current revenue. At end-2014, the city's direct debt amounted to PLN6bn or 50% of current revenue (2013: PLN5.9bn or 53%). Due to the city's substantial cash levels, net direct debt was only PLN3.8bn at end-2014 or 32% of current revenue.

Additional pressure on Warsaw's budget stems from compensation payments to individuals whose property was nationalised directly after World War II. Between 2008 and 2014 the city paid out about a total of PLN1.1bn (with 35% funded from the state budget). In 2015-2017 Fitch expects these compensation payments to remain in line with the average PLN300m of 2011-2012 and 2014. A recent change of law has granted Warsaw refunds of compensation payments of up to PLN200m annually from the National Reprivatisation Fund during 2015-2016. While this does not solve the problem for the city, in Fitch views this support should help alleviate most of the pressure on the city's budget in this period.

Due to the investments of municipal companies, Fitch expects the city's indirect debt to rise to about PLN2.9bn in 2017 from PLN2.4bn in 2014. The city supports essential projects mostly through long-term service agreements, mainly with its public transport companies. This may create considerable pressure on operating expenditure and limit the city's budget flexibility in the long term.

The city's diversified and wealthy economy, with a gross regional product per capita at about 3x the national average, results in high tax revenue (38% of operating revenue in 2014). However, this also exposes the city to economic cycles, which is exacerbated by payments made into Poland's equalisation mechanism. Fitch expects the city's tax revenue to continue to grow in 2015-2016, supported by forecast GDP growth of 3% per year.

Sustained deterioration of operating performance with an operating margin below 3%, coupled with a declining cash buffer, and/or debt growth far exceeding projections, may lead to a negative rating action.

Fitch assumes that Warsaw will not face the requirement to settle all at once compensation payments to individuals for nationalising their properties after World War II, but that the settlement will be spread over a number of years, hence not threatening the city's finances.

Fitch also assumes that the city will comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU. Otherwise, Warsaw will face the penalty of having to return a substantial amount of the previously received EU grants.

Fitch further assumes that the city will not face any major compensation payments to the contractors of the city's investments or compensation for the changes in the area's development plans approved by the city's authorities, and will not have to return substantial amounts of taxes received in previous years.
Company — Warsaw
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    Miasto stoleczne Warszawa
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