Last week S&P lowered Bulgaria's long- and short-term foreign and local currency sovereign credit ratings to 'BB+/B' from 'BBB-/A-3', with a stable outlook. The rating agency said at the time that the downgrade reflects the its view of a weakened domestic banking system, which has obligated Bulgaria to directly and indirectly support the third- and fourth-largest banks, the risk that further state support to the domestic financial sector might be required, and a broader deterioration in general government finances - owing to weak growth and persistent deflation - which could require higher borrowing over 2014-2017.
S&P also said in the statement:
“Under our methodology, a local or regional government (LRG) can be rated higher than its sovereign if we believe that it exhibits certain characteristics, as described in "Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions," published Nov. 19, 2013. We do not currently believe that Bulgarian LRGs, including Sofia, meet these conditions. Consequently, we do not see a possibility that we could rate Sofia higher than Bulgaria.
Based on Sofia's intrinsic credit strengths and in accordance with our criteria, we assess Sofia's stand-alone credit profile (SACP) at 'bbb'. The SACP is not a rating but a means of assessing the intrinsic creditworthiness of a LRG under the assumption that there is no sovereign rating cap.
The SACP on Sofia reflects our view of the city's exceptional liquidity and strong budgetary flexibility, based on its significant autonomy in managing local revenues. This flexibility is somewhat constrained, however, by the city government's reluctance to raise taxes and charges ahead of municipal elections in the third quarter of 2015. Sofia's economic wealth is average compared with international peers, in our view.
The SACP is constrained by Sofia's evolving but unbalanced institutional framework. Combined with weak, albeit strengthening financial management, this limits the predictability of the city's financial performance. A large capital investment program will likely keep our assessment of the city's budgetary performance at average, with widening deficits after capital accounts. It will also see the city's debt burden remain high, including relatively high exposure to market risks and high contingent liabilities relating to its exposures to municipal companies and a municipal bank.
We might revise the SACP downward if we notice a weakening of the institutional framework under which Bulgarian local governments operate.
The stable outlook mirrors that on Bulgaria. Any rating action we take on the sovereign would likely be followed by a similar action on Sofia as long as the city's intrinsic credit characteristics remain aligned with our base-case scenario.
There is no intrinsic upside scenario for Sofia because, under our criteria, we do not currently rate Bulgarian municipalities above the sovereign. We view a downside scenario as highly unlikely because the SACP on the city is higher than the credit rating.
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research')."
