S&P revises Bulgarian city Stara Zagora outlook to stable, affirms rating at BB+

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 consider 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 consider that Bulgarian LRGs, including Stara Zagora, meet these conditions. Consequently, we do not see a possibility that we could rate Stara Zagora higher than Bulgaria. Stara Zagora's stand-alone credit profile (SACP) remains 'bb+'.

The rating on Stara Zagora is constrained by the evolving but unbalanced institutional framework under which Bulgarian cities operate and Bulgaria's relatively weak economy and low wealth levels, compared with international peers. Although we acknowledge that Stara Zagora has strengthened its budgeting procedures, we still consider its financial management weak due to its limited track record of maintaining tight fiscal policy.

The rating is supported by Stara Zagora's very low debt burden and low contingent liabilities. We view the city's liquidity position as adequate. We also consider that the city has average budgetary flexibility, mostly through its high degree of autonomy in setting taxes, which is partly offset by restricted expenditure flexibility and average budgetary performance.

OUTLOOK

The stable outlook on Stara Zagora mirrors that on Bulgaria.

We could raise the rating on Stara Zagora, if we raised the rating on Bulgaria and at the same time, the city extends the maturity of its debt as planned and remains committed to keeping the debt burden modest, as targeted in its three-year budget. This would give it a slight deficit after capital accounts and sound liquidity on average over the next 18 months.

We could lower the rating on the city if we lowered the rating on Bulgaria. Alternatively, we could lower the rating on the city, even if the sovereign rating remained unchanged, if within the next 18 months the city materially deviated from its financial targets and reported persistent deficits after capital accounts, leading to a rising debt burden and pressure on the city's liquidity position.

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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')."