(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 limited financial predictability, relatively low economic wealth, and the anticipated implementation of its 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 of managing its own revenues, and a good liquidity position.
Uncertainty over future Bulgarian intergovernmental reforms, a broad revision of the city's long-term financial plans after a post-election reorganization of the city's administration, and in our view significant infrastructure needs make the city's financial policy less predictable in the medium term. We therefore consider that the city's budgetary performance could become more volatile.
We consider that Plovdiv's modest economic recovery and low levels of wealth could constrain revenue growth. We estimate the city's GDP per capita at about a moderate $7,000 in 2011. In our base-case scenario, we expect the city's economy to recover slowly after stagnating in 2008-2010. We forecast Plovdiv's GDP to expand by 2.0% on average over 2012-2015, which is in line with our forecast for Bulgaria's economic growth.
In line with our base-case scenario, we expect the city's operating performance to weaken in 2013-2015, although it should remain sound after a significant improvement in 2011-2012 owing to cuts in maintenance costs and a higher collection rate of municipal taxes and charges. We anticipate a rebound in operating expenditure (opex) to make up for reductions in previous years. Therefore, we expect the city's adjusted operating surplus (net of state-delegated tasks and revenues) as a percentage of adjusted operating revenues to gradually weaken to 7.6% in 2015 compared with a projected 12.2% in 2011-2012 on average.
We consider that the city is benefitting from increased responsibility with regard to the management of its taxes and charges. For example, while the central government controls the tax base and sets the floor and ceiling tax rates, the city can raise up to 50% of operating revenues if the tax rates are set at the maximum level and collectability rates remain unchanged.
The city is striving for increased investment in local infrastructure and has a strong focus on transport and water projects, as well as sport facilities. Its adjusted deficit after capital accounts, as a percentage of adjusted total revenues, is therefore likely to increase to about 16% on average after a surplus of about 6% in 2011-2012. We consider that this indicator could be more volatile and prone to downward pressure unless the city has a medium-term capital investment plan in place. Nevertheless, our base-case scenario assumes that the city will continue to receive regular payments from the central government for the disposal and processing of the capital city's waste. We believe it will also continue to benefit from EU funds. These measures 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 percentage of adjusted operating revenues could increase to 90% by year-end 2015 from the 42% projected by the end of 2012. Due to its reliance on long-term borrowings, however, Plovdiv's debt service will remain below a modest 8% of adjusted operating revenues over 2013-2015. The city has very little 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 well exceed its debt service falling due in the next 12 months. However, we expect the city's liquidity position to be volatile owing to its uncertain investment policy, high levels of cash reserved for state-delegated tasks, and its exposure to credit risks from the Bulgarian banking system. The city's access to external liquidity in the context of Bulgaria's relatively weak banking 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 this bond. In our base-case scenario, we expect the city to continue to rely on long-term debt that will 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 2012-2013 due to the implementation of its ambitious investment program, a relatively high component of cash that can be used to finance state-delegated tasks, and exposure to Bulgarian banks with lower creditworthiness.
Since the beginning of 2011, cash allocated for state-delegated tasks has accounted for about 60% of the city's total cash available. We assume that the city will retain almost unlimited 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 credit ratings, but we do not apply a haircut to cash holdings. We understand that banks in Bulgaria are legally obliged to hold Bulgarian treasuries as collateral for municipalities' cash holdings at a special account at the Bulgarian National Bank. Nevertheless, if the Bulgarian National Bank were to revise its policy, we could revise our assessment of the city's liquidity position downward.
We view the city's access to external liquidity as being limited, on account of Bulgaria's weak 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 Industry Country Risk Assessments," published July 15, 2011).
Plovdiv's senior unsecured debt is rated 'BB+'. The '3' recovery rating on this debt indicates our expectation of a 'meaningful' recovery from 50% to 70% in an event of payment default.
The positive outlook reflects our expectation that Plovdiv will be able to address its infrastructure needs with only a gradual debt accumulation and while maintaining its liquidity position. This is due to capital transfers from the central government and EU funds, the city's relatively 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 management implements 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 broadly stabilize at about 10% of adjusted total revenues on average over the next two-to-three years and result in a gradual accumulation of debt and a structurally stronger liquidity position. In our upside scenario, we expect the city's tax-supported debt to remain below 100% of adjusted operating revenues for the next five years.
We could revise the outlook to stable within next 12 months, if, as in our base-case scenario, Plovdiv's budgetary performance and liquidity position remain unpredictable and volatile.
Related Criteria And Research -- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Public Finance System Overview: Bulgarian Municipalities Continue Fiscal Decentralization And Heighten Transparency," published June 18, 2009.
-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009
-- Methodology And Assumptions: Assigning Recovery Ratings To International Local And Regional Governments' Speculative-Grade Debt, Feb. 3, 2009