Fitch has also upgraded the short-term foreign currency rating to ‘F3’ from ‘B’. The ratings have been removed from Rating Watch Positive where they were placed on July 7, 2011, after Romania’s sovereign ratings were upgraded, Fitch said in a news release.
“The ratings take into account the city’s improvement in budgetary performance and its good track record of debt coverage ratios. The ratings take also into account Bucharest’s increasing debt, which is prudently managed in Fitch’s view,” it said.
Fitch added that a positive rating action would result from operating performance remaining at current levels, a debt to current revenue ratio below 100% and ongoing healthy debt coverage ratios, provided there was an upgrade of the sovereign’s ratings. Changes in law, granting Bucharest higher revenue flexibility would be also rating positive, as Bucharest has a strong tax gaining capacity.
On the other hand, a negative rating action would be triggered by a deterioration of the operating performance, as this would reduce Bucharest’s ability for self-financing large parts of its high capital investments, which Fitch currently views positively. “Deterioration in operating performance would also put pressure on the debt coverage ratios and increase the debt payback ratio. An increase of debt above 100% of current revenues would also be rating negative, especially if it was accompanied by a weaker operating performance,” the statement also mentioned.
Operating margin averaged a strong 30% in 2006-2010 and was 32% in 2010. This was sufficient to cover interest paid by more than 10 times. A strong operating performance is a precondition for the funding of the city’s investment plan, as the ability to gain capital revenues is limited. Its current balance was sufficient to fund 82% of Bucharest’s capital expenditure. The city has stated a margin of around 30% for 2011-2014 in its four-year financial plan.
Outstanding direct debt amounted to RON3.1 billion at end-2010 (76% of current revenue), Fitch noted, adding that debt will start slightly decreasing in 2012. “However, Bucharest faces a large refinancing risk, when the EUR500 million Eurobond will mature in 2015, which Fitch will closely monitor. Bucharest is exposed to debt service for and guarantees provided to two fully owned companies and for one minority shareholding amounting to about RON300 million (9.7% of direct debt) at end-2010.”