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S&P affirms Bulgaria's Stara Zagora city at BBB-, outlook stable

S&P affirms Bulgaria's Stara Zagora city at BBB-, outlook stable gary yim/

SOFIA (Bulgaria), September 16 (SeeNews) - Standard & Poor's (S&P) said it has affirmed the BBB- long-term issuer credit rating of the Bulgarian city of Stara Zagora with a stable outlook.

"We expect an uptick in Stara Zagora's capital program, resulting in deficits after capital accounts over 2019-2021," the ratings agency said in a statement on Friday.

The city's large share of EU funding is expected to result in debt absorption taking the form of temporary bridge financing when the related projects approach the final stages, S&P said. 

The ratings agency also said in the statement:


The outlook is stable because we expect the city's deficits after capital accounts will be contained at less than 5% of revenue, allowing it to keep low debt levels. Furthermore, we expect the city to continue its policy of securing external funding for projects prior to execution, thus limiting pressure on its liquidity position.

Downside scenario

We would consider a negative rating action on Stara Zagora if its management wasn't able to preserve the current financial indicators, for example, by failing to secure timely financing for its planned projects. This would likely see the city's financial performance worsen and put pressure on liquidity, or mean faster debt accumulation.

Upside scenario

We could consider a positive rating action if we observe significant structural improvements in the city's financial policies and planning, or a sustainable improvement in liquidity. We would, however, only consider this scenario if we also upgraded Bulgaria.


We assume that the city will contain its deficits after capital accounts over our forecast horizon through 2021. Given the large and mostly EU-funded capital plan, we believe the city will assume debt to finance its own share of the projects and for bridge financing. As such, we think that some debt will be temporary in nature, meaning it will overall remain a small share of the municipal budget. We continue to see the city's small budget and dependency on the timing of project executions as a source of volatility for municipal financial indicators, while also limiting its flexibility for budget changes. Nonetheless, robust economic growth in the country should allow for solid tax revenue and continued subsidies from the state government, translating into stable operating surpluses for the city.

The institutional framework, economy, and financial policies limit Stara Zagora's creditworthiness

The institutional framework under which Bulgarian local and regional governments operate is still evolving. Consequently, Stara Zagora's finances are fairly unpredictable, given the important role the central government plays in the intergovernmental system. We believe, there may be some unexpected changes in the distribution of revenue and government-mandated spending, due to the ongoing decentralization process.

Within this framework, we view the city's financial management as lacking in long-term planning, which ultimately weakens the predictability and efficiency of policymaking. Similarly to peers in the region, political considerations could interfere with important financial decisions. The disclosure standards for municipal companies are limited, but we believe monitoring of this small sector is adequate. Positively, the city usually has a relatively smooth budgeting process as well as an adequate debt policy, with the tendency to secure pre-funding for its capital projects.

We also take into account the city's low economic wealth, based on the national GDP per capita figure, expected at about $9,500 in 2019. Stara Zagora is located in the center of Bulgaria, near the country's largest power complex. This supports the regional economy, which enjoys a low unemployment rate and high wages. The city's wealth levels are low, but robust economic growth across the country will allow for solid tax revenue and continued subsidies from the state government. On the regional level, exposure to coal power generation might pose a medium-term challenge for the city's economy in terms of employment and demographics, since the effect of a possible transition to other energy sources is currently uncertain.

The large share of EU and government funding limits flexibility over financials, but also mitigates medium-term debt absorption

We forecast the city will maintain stable operating balances, supported by continued economic growth at the national level, leading to increases in revenue and government transfers. Transfers from the central budget will continue to constitute a relatively high share of the municipal budget, and are designated for specific expenditure. This leaves limited headroom for the city to modify over half of its budget. The city can, in theory, independently modify some its own sourced revenue. However, the actual use of this flexibility is subject to management's decision, and we think it could be hampered by political considerations. We also foresee elevated levels of capital expenditure over 2019-2021, representing a pickup in the EU budget cycle. This will create a negative balance after capital accounts, although we believe deficits will remain below 5% on average of total revenues.

The municipal investment program principally focuses on educational infrastructure, street renovations, energy efficiency, and sustainable transportation. The city aims to finance the majority of these projects using EU funds, which should support low, albeit increasing, debt levels. Positively, EU funded projects are carried out through off-budget accounts, which reduces pressure on the municipal budget. Nonetheless, we understand this structure will require the city to absorb debt to bridge finance the final stages of the projects before it receives reimbursement from the EU. We believe part of this municipal debt will likely be temporary and cyclical in nature. However, we also expect some to be long term, which will see tax-supported debt as a percentage of consolidated operating revenue more than double to 17% by year-end 2021, from about 8% in 2018.

The city's dependency on EU project timelines and funding could also expose it to liquidity volatility, temporarily weakening the debt-service-coverage ratio. To help mitigate this, the city secured a Bulgarian lev 10 million (about €5.1 million) credit line toward year-end 2018 for EU-related projects. However, we expect the city's current internal liquidity sources alone will be sufficient to cover more than 100% of uses in the next 12 months.

Although Stara Zagora has a track record of securing external funding when needed, we continue to factor into our liquidity assessment Bulgaria's weak domestic banking sector. In our view, this could hamper the city's access to external liquidity at times."