SOFIA (Bulgaria), September 19 (SeeNews) – Standard&Poor's Ratings Services (S&P) has said it affirmed the BB+ long-term issuer credit rating of the Bulgarian city of Stara Zagora.
The outlook on the city remains stable and reflects the outlook on Bulgaria, the ratings agency said in a statement late on Friday.
S&P said that it expects Stara Zagora's medium-term budgetary performance to remain strong in 2016-2018 period, largely in line with its previous projections.
"We expect the peak in debt at year-end 2015 and decrease in cash related to the end of the EU's current capital expenditure funding cycle to be temporary, since the city will be reimbursed for most of these expenditures," it added.
The ratings agency also said in the statement:
RATIONALE
The long-term rating on Stara Zagora primarily reflects our 'BB+' long-term sovereign credit rating on Bulgaria. We do not consider that the city meets the criteria under which we would rate a local or regional government (LRG) higher than the related sovereign. We consequently cap the long-term rating on Stara Zagora at the level of our long-term rating on Bulgaria. In our opinion, Bulgarian cities, including Stara Zagora, are not able to maintain more resilient credit characteristics than the sovereign in a stress scenario. The cities have limited ability to oppose reforms to their institutional framework. Although they receive a large portion of revenues for state-delegated tasks from the national budget, they are also bound by the central government's decisions concerning revenue and expenditure.
We continue to assess Stara Zagora's stand-alone credit profile (SACP) at 'bbb-' and consider that it remains burdened by possible volatility in financial indicators due to the city's small size. An SACP assessment is not a rating but a means of evaluating the intrinsic creditworthiness of an LRG under the assumption that there is no sovereign rating cap. The SACP level results from the combination of our assessment of an LRG's individual credit profile and the institutional framework in which it operates.
Stara Zagora's SACP is supported by its very low debt burden and low contingent liabilities. We also believe that the city has average budgetary flexibility, reflecting its high autonomy to set taxes, although this is offset by constrained expenditure flexibility. Stara Zagora also reports a strong budgetary performance. Benefitting from this development, the city's liquidity is adequate, in our view.
The SACP is constrained by our view of the evolving and unbalanced institutional framework in which Bulgarian cities operate and by the city's weak economy, with low wealth levels in an international context. Although we acknowledge that the city's budgeting procedures are strengthening, we still regard its financial management as weak, due to a limited track record of tight fiscal policy and developing long-term financial planning. Our view of the institutional framework reflects the possibility of unexpected changes in the distribution of LRGs' revenues and government-mandated spending.
We view Stara Zagora's economy as weak because, although the city benefits from its proximity to the largest energy complex in Bulgaria, its economic wealth is relatively low. We estimate Bulgaria's national GDP per capita at a modest $6,800 in 2016, partly due to movements in the euro-U.S. dollar exchange rate. In our view, real GDP per capita will increase by slightly more than 2% per year, on average, over 2016-2018. Stara Zagora's population is declining, in line with the national trend, but we acknowledge that the trend has slowed over the past few years. The city also shows good unemployment figures compared with the national average.
In our opinion, Stara Zagora's budgetary flexibility remains average. The city has the ability to adjust the majority of its own revenues, such as taxes, which it can set independently within a legally defined range. In addition, we project the city's capital expenditures will remain high. However, we still believe the city is reluctant to raise tax rates over the next two years. In addition, Stara Zagora has large infrastructure needs, which it started to address in 2013, aided by significant cofinancing from EU funds. We anticipate further strong investment activity over 2016-2018 during the next round of EU financing. These investments will mainly be funded via EU subsidies, with low municipal cofinancing requirements.
Taking into account the city's progress in recent years' budget execution, we project strong budgetary performance in our base case until year-end 2018. We expect Stara Zagora will improve its operating balance to about 14% of operating revenues and achieve a slightly positive balance after capital accounts of 0.4% of total revenues on average in 2016-2018. In 2015, the city's operating revenues contracted slightly, based on transfers between budgets. Because some of these transfers are to be returned in the current year, they appear in the 2016 budget. We also expect a slight contraction of capital expenditure over the next few years, owing to the delayed passing of the EU budget for 2014-2020. Overall, we still consider it likely that Stara Zagora will be able to retain its strong budgetary results. Nevertheless, the city's budgetary performance is volatile, in our view, partly because of the small size of its budget.
Debt increased significantly in 2015 to 33% of operating revenues (from 12% at year-end 2014) because of temporary bridge funding for the execution of capital expenditures, most of which the city will be reimbursed for, with a time lag. However, a large share of this additional debt was repaid in the first half of 2016, and we expect the city's direct debt will remain below 15% of operating revenues until 2018. In our view, contingent liabilities are low and limited to the obligations of a few health care institutions and the city's public transportation company.
We still consider financial management to be weak in a global context, due to the city's limited track record of tight fiscal policy. But we consider that there has been an improvement over recent years in the city's budgeting, debt, and liquidity management, and that its long-term financial planning is developing.
LIQUIDITY
We continue to assess Stara Zagora's liquidity as adequate.
The city's average free cash and liquid assets in the last 12 months totaled about Bulgarian lev (BGN) 9 million (about €4.6 million). Adjusting for the projected balance after capital accounts and after applying a haircut, as per our methodology, we expect Stara Zagora to maintain its exceptional debt-coverage ratio exceeding 100%. We expect the city's debt service to amount to BGN3.9 million over the coming 12 months.
Nevertheless, we expect the city's liquidity position will remain volatile because its cash holdings are limited and future exposure to short-term debt is difficult to predict.
Stara Zagora's access to external liquidity also remains limited in the context of Bulgaria's relatively weak banking sector and shallow capital market. Our Banking Industry Country Risk Assessment places Bulgaria's banking sector in group '7' (group '1' denotes the lowest-risk banking sectors and group '10' the highest risk; see "Banking Industry Country Risk Assessment: Bulgaria," published Dec. 22, 2015, on RatingsDirect).
OUTLOOK
The stable outlook on Stara Zagora reflects that on Bulgaria.
We could raise the rating on Stara Zagora in the next 12 months if we raised the rating on Bulgaria to 'BBB-' and the city's stand-alone credit quality remained in line with our base-case scenario.
We would lower the rating on Stara Zagora in the next 12 months if we lowered the ratings on Bulgaria. Alternatively, we could lower the rating on the city, even if the sovereign rating remained unchanged, if Stara Zagora materially missed its financial targets and reported persistently high deficits after capital accounts, leading to increased debt and pressure on liquidity. We currently see this scenario as unlikely, however.