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Fitch Affirms City of Rybnik at 'A+(pol)'; Outlook Stable

July 3, 2015
Fitch Ratings has affirmed the Polish City of Rybnik's National Long-term rating at 'A+(pol)'. The Outlook is Stable.

The affirmation reflects the maintained sound operating performance despite an expected increase in direct debt.

Rybnik's rating reflects our expectation that the city will maintain its solid operating performance in the medium term, despite the ongoing pressure on opex, which has a rigid structure, as is typical for many Polish LRGs. The rating also takes into account the projected increase in direct debt to finance new investments. The rating factors in Rybnik's sound liquidity and its prudent financial management mitigating the risk of higher debt service in 2015-2017.

We expect Rybnik to maintain operating margins of about 11%-12% in 2015-2017, according to our unchanged base case scenario. We assume that the city will continue with efficient opex control as it has in the past. Rybnik has a track record of good operating performance. In 2014 Rybnik reported a very high margin of 15.4% but deducting one-off revenues of PLN25m (eg. VAT, compensation payments) the margin would be 11.3%, slightly lower than the 12%-13% achieved on average in 2011-2013.

For 2015 we expect the city to finalise current investments and for capex to make up PLN110m or 16% of total expenditure. The investments will be financed from Rybnik's own sources and EU grants. In 2016-2017 we project capex will make up around PLN300m or 20% of total expenditure, financed by current balance and capital revenue and about 15% by debt. The construction of the regional expressway crossing Rybnik (costing about PLN600m), which is not finally decided, will determine the city's investment programme in 2016-2020.

Direct debt should remain below 20% of current revenue in 2015-2017, in line with our baseline projections for the city and despite the projected debt growth. We expect Rybnik's debt to grow to about PLN110m by 2017 from PLN58m at end-2014. The city aims to incur a smoothly amortising and long-term loan with an international financial institution that would lower the pressure on debt service for the city's budget.

Rybnik's debt service will rise to 31% of the operating balance in 2017 from 25% in 2014. This will result mainly from the bond redemption schedule. Rybnik's direct debt is 70% made up of bonds that amortise by PLN12m (in 2015), PLN14m (2016) and PLN14.5m (2017). A strong operating balance, which we project will cover the debt service by more than 3x and expected sound liquidity mitigate the risk of high redemption.

We expect Rybnik's liquidity to remain sound in 2015-2017. The account balance at end-2014 was over PLN67m and rose to PLN106m at end-April 2015. The city has sufficient funds to settle financial liabilities. In addition, the cash balance was sufficient to cover debt service of about PLN24m in 2014 by 2x. As in 2012-2013, the interest revenue exceeded the city's interest expenses, reducing pressure on the budget.

The rating could be upgraded if the city strengthens its operating performance on a sustained basis, with an operating margin above 14% and containment of direct risk at less than 20% of current revenue.

Although a downgrade is currently unlikely, it could result from sustained deterioration of operating performance far beyond Fitch's expectations or a significant rise in debt resulting in weak debt coverage of more than six years.

Fitch expects the city to continue its efficient opex control and to manage the budget prudently in the medium term.

Fitch assumes the construction of the regional expressway crossing Rybnik (connecting Raciborz with Pszczyna) will be confirmed subject to the receipt of EU grants of up to PLN300m.
Company — Rybnik
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