(The following statement was released by the rating agency)
Oct 12 - =============================================================================== Summary analysis -- Plovdiv (City of) ----------------------------- 12-Oct-2012 =============================================================================== CREDIT RATING: BB+/Positive/-- Country: Bulgaria Primary SIC: Legislative bodies =============================================================================== Credit Rating History: Local currency Foreign currency 12-Feb-2007 BB+/-- BB+/-- 10-Dec-2004 BB/-- BB/-- =============================================================================== Rationale
The rating on Bulgaria's second-largest city, Plovdiv, is constrained by the city's limitedfinancial predictability, relatively low economic wealth, and the anticipated implementation ofits investment program, which we consider could lead to a large and volatile budget deficit.Nevertheless, Plovdiv benefits from a favorable debt profile, the increased responsibility ofmanaging its own revenues, and a good liquidity position.
Uncertainty over future Bulgarian intergovernmental reforms, a broad revision of the city'slong-term financial plans after a post-election reorganization of the city's administration, andin our view significant infrastructure needs make the city's financial policy less predictablein the medium term. We therefore consider that the city's budgetary performance could becomemore volatile.
We consider that Plovdiv's modest economic recovery and low levels of wealth could constrainrevenue growth. We estimate the city's GDP per capita at about a moderate $7,000 in 2011. In ourbase-case scenario, we expect the city's economy to recover slowly after stagnating in2008-2010. We forecast Plovdiv's GDP to expand by 2.0% on average over 2012-2015, which is inline with our forecast for Bulgaria's economic growth.
In line with our base-case scenario, we expect the city's operating performance to weaken in2013-2015, although it should remain sound after a significant improvement in 2011-2012 owing tocuts in maintenance costs and a higher collection rate of municipal taxes and charges. Weanticipate a rebound in operating expenditure (opex) to make up for reductions in previousyears. Therefore, we expect the city's adjusted operating surplus (net of state-delegated tasksand revenues) as a percentage of adjusted operating revenues to gradually weaken to 7.6% in 2015compared with a projected 12.2% in 2011-2012 on average.
We consider that the city is benefitting from increased responsibility with regard to themanagement of its taxes and charges. For example, while the central government controls the taxbase and sets the floor and ceiling tax rates, the city can raise up to 50% of operatingrevenues if the tax rates are set at the maximum level and collectability rates remainunchanged.
The city is striving for increased investment in local infrastructure and has a strong focuson transport and water projects, as well as sport facilities. Its adjusted deficit after capitalaccounts, as a percentage of adjusted total revenues, is therefore likely to increase to about16% on average after a surplus of about 6% in 2011-2012. We consider that this indicator couldbe more volatile and prone to downward pressure unless the city has a medium-term capitalinvestment plan in place. Nevertheless, our base-case scenario assumes that the city willcontinue to receive regular payments from the central government for the disposal and processingof the capital city's waste. We believe it will also continue to benefit from EU funds. Thesemeasures should reduce the city's rate of debt accumulation.
As a result of the city's widening deficit, we expect its tax-supported debt as a percentageof adjusted operating revenues could increase to 90% by year-end 2015 from the 42% projected bythe end of 2012. Due to its reliance on long-term borrowings, however, Plovdiv's debt servicewill remain below a modest 8% of adjusted operating revenues over 2013-2015. The city has verylittle involvement in the local economy, therefore its contingent liabilities remain limited.
In line with our methodology, we consider Plovdiv's liquidity to be neutral to the rating.Our assessment reflects our expectation that the city's average cash on accounts will wellexceed its debt service falling due in the next 12 months. However, we expect the city'sliquidity position to be volatile owing to its uncertain investment policy, high levels of cashreserved for state-delegated tasks, and its exposure to credit risks from the Bulgarian bankingsystem. The city's access to external liquidity in the context of Bulgaria's relatively weakbanking sector and shallow capital market will likely remain limited, in our view.
From Aug. 1, 2011 to July 1, 2012 the city's average cash accounted for about Bulgarian lev(BGN) 19 million. This almost exceeds its debt service falling due in the next 12 months by 3x.
The city's debt service consists of an evenly amortizing bond and interest payments on thisbond. In our base-case scenario, we expect the city to continue to rely on long-term debt thatwill keep its debt service stable at least until 2015.
At the same time, we believe that the city's average cash will be volatile over 2012-2013due to the implementation of its ambitious investment program, a relatively high component ofcash that can be used to finance state-delegated tasks, and exposure to Bulgarian banks withlower creditworthiness.
Since the beginning of 2011, cash allocated for state-delegated tasks has accounted forabout 60% of the city's total cash available. We assume that the city will retain almostunlimited access to this cash as far as state-delegated tasks are properly funded.
The city holds free cash on accounts and deposits of unrated banks and those with low creditratings, but we do not apply a haircut to cash holdings. We understand that banks in Bulgariaare legally obliged to hold Bulgarian treasuries as collateral for municipalities' cash holdingsat a special account at the Bulgarian National Bank. Nevertheless, if the Bulgarian NationalBank were to revise its policy, we could revise our assessment of the city's liquidity positiondownward.
We view the city's access to external liquidity as being limited, on account of Bulgaria'sweak domestic banking sector, as reflected in our banking industry country risk assessment(BICRA) score of '7' (1 being the lowest risk, and 10 being the highest; see "Banking IndustryCountry Risk Assessments," published July 15, 2011).
Plovdiv's senior unsecured debt is rated 'BB+'. The '3' recovery rating on this debtindicates our expectation of a 'meaningful' recovery from 50% to 70% in an event of paymentdefault.
The positive outlook reflects our expectation that Plovdiv will be able to address itsinfrastructure needs with only a gradual debt accumulation and while maintaining its liquidityposition. This is due to capital transfers from the central government and EU funds, the city'srelatively high budgetary flexibility, and the gradual implementation of its investment program.
We could raise the rating in the next 12 months if we observe that the city's managementimplements its medium-term financial plan, thereby addressing the city's infrastructure needs.In line with our upside scenario, the city's deficit after capital accounts would broadlystabilize at about 10% of adjusted total revenues on average over the next two-to-three yearsand result in a gradual accumulation of debt and a structurally stronger liquidity position. Inour upside scenario, we expect the city's tax-supported debt to remain below 100% of adjustedoperating revenues for the next five years.
We could revise the outlook to stable within next 12 months, if, as in our base-casescenario, Plovdiv's budgetary performance and liquidity position remain unpredictable andvolatile.
Related Criteria And Research -- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Public Finance System Overview: Bulgarian Municipalities Continue Fiscal DecentralizationAnd Heighten Transparency," published June 18, 2009.
-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And RegionalGovernments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009
-- Methodology And Assumptions: Assigning Recovery Ratings To International Local AndRegional Governments' Speculative-Grade Debt, Feb. 3, 2009