Bucharest’s EUR500 million eurobond has also been affirmed at ‘BBB-‘. “The rating actions affect approximately RON2,860 million (equivalent to approximately EUR629 million) of direct debt outstanding at end-2011, as well as future borrowings,” Fitch said in a statement.
It said the ratings reflect Bucharest’s strong operating performance and a significant decline of its operating spending in particular, its status as Romania’s capital and the wealthy and diversified local economic structure as well as the city’s moderate debt servicing ratios. Fitch also takes into account the still volatile political situation in Romania and the devaluation of the leu, which puts additional pressure on the city’s debt service requirements since all debt is in foreign currency, the high investment needs and uncertainties on the contingent liabilities.
“An operating margin not lower than 30%, debt to current revenue ratio below 100% and healthy debt coverage ratios are positive for the ratings, provided there has been an upgrade of the sovereign rating. A negative rating action would be triggered following a deterioration of the operating performance, because of the accompanied decline in the city’s ability to self-finance a large part of its still significant investment needs. Should the penalty interest result in a significant increase of the city’s debt or weigh strongly on the debt service, this will be also rating negative,” Fitch said.
The ratings agency noted that, in 2011, the operating margin covered interest paid by at least nine times and the city’s current balance was sufficient to fund 87% of its capital expenditure. According to the four-year financial plan for the city, the operating margin should remain around 30% until 2014.
Fitch said that, given the city’s extended maturing profile, annual debt service was a relatively low 6.6% of current revenue in 2011 and is expected to further ease, since Bucharest has no immediate plans to contract new debt. “A potential funding gap could get covered by the city’s cash level, which should at least be sufficient to cover the annual debt service requirements for 2012.”
On the other hand, direct risk increased in 2011, only following a weaker leu, as Bucharest is entirely exposed to foreign currencies. Therefore, Bucharest faces increasing debt service requirements and a large refinancing risk, when the EUR500 milllion eurobond matures in 2015.