BUCHAREST (Romania), July 6 (SeeNews) - Fitch Ratings said it has affirmed the long-term foreign and local currency rating of the Romanian city of Oradea at 'BBB-' and short-term foreign currency rating at 'F3' .
"The outlooks for the Long-term ratings are Stable. The rating actions affect approximately 258 million lei [$70.5 million/57 million euro] of direct debt outstanding at end-2011, as well as future borrowings," Fitch Ratings said in a statement on Thursday.
The rating agency also said in the statement:
"The ratings reflect its ongoing positive economic development, political continuity at the local level, sound budgetary performance, and conservative regulatory framework. It also takes into account the relative low level of (financial) autonomy together with the volatile political situation in Romania which may impact on fiscal and economic policy in light of the next elections in autumn and the risks associated with its increasing debt level.
An operating performance remaining well above 20% ensuring debt service coverage at current levels and reduced net new debt requirements to fund investments could trigger a positive rating action. However, as far as the foreign currency ratings would be affected, this would rely on an upgrade of the sovereign's foreign currency ratings, as Romanian locals can not be rated above the sovereign. A negative rating action could be triggered by an operating performance halving to 10% and resulting in a reduced coverage of capital expenditure and a concurrent deterioration of the debt and debt service ratios.
Romania's economy turned positive in 2011 and GDP grew by 2.5% in real terms (2010: -1.6%). According to Fitch, lower growth of 1.3% is expected in 2012, well below the average growth of 3.9% achieved in the 2005-09 term. This is reflected in the growth of the city's tax income, which slightly recovered by about 3.4% in 2011. The local wealth level is above the national average and Bihor counties unemployment rate improved to 4.1% at end-2011 (Romania: 5.1%) and was 4% in March 2012.
Oradea is embedded in a conservative regulatory framework with statutory debt limits. Although debt significantly increased, especially in 2007-09, the city remains below its statutory limits (annual debt service is limited to 30% of Oradea's average of the past three years actual revenues) while realising a number of important projects for its infrastructural development. The Mayor was recently re-elected and now has a two-thirds majority. The ruling party is the same as at the national level supporting the relationship to the central government.
Oradea's operating margin recovered to 22.3%, the highest margin over the past five years. The margin is sufficient to cover interest cost by at least 12x and direct debt servicing about 4x. Interest costs account for a low 1.9% of operating revenue and current margin remains above 20% ensuring sufficient room for the city's investments. According to estimates by Fitch, the operating performance should remain around the current level over 2012-14.
Oradea reported a small surplus before debt variation of 0.4% of total revenues in 2011. Debt increased about 16% in 2011 and amounted to 258 million lei at end-2011. The debt structure is amortising with maturities of at least five years and above. Debt payback was three years at end-2011. Oradea contracted a 10.36 million euro loan and a 25 million lei loan in 2011 and aims to draw 5.1 million euro and the latter in full during 2012. It also plans to contract a 20 million euro loan to co-finance EU projects and debt could increase by about 100 million lei in 2012. As most of the debt is contracted in euro, the city is exposed to exchange rate risks.
Oradea has shares in five municipal companies together accounting for 182.8 million lei of indirect debt and the city provides a guarantee for the fuel acquisition of its energy provider amounting to 20 million lei. Net overall risk amounted to RON452.9m at end-2011 and to RON445.9m including the cities cash of 7 million lei."
(1 euro=4.5338 Romanian lei)