http://www.reuters.com/article/2012/06/27/idUSWNA012020120627

TEXT-S&P raises Stara Zagora, Bulgaria rating to 'BB+'

Wed Jun 27, 2012 12:04pm EDT
June 27 - Overview
     -- In 2011, the Bulgarian city of Stara Zagora achieved a very strong
budgetary performance for the second consecutive year thanks to improved
revenues.
     -- This reduced its exposure to short-term debt and increased its cash on
accounts, thereby strengthening its liquidity position.
     -- Due to our forecast economic recovery for Bulgaria, and Stara Zagora's
limited capital investment program, we expect the city to maintain a strong
budgetary performance and low debt during 2012-2014.
     -- We are therefore raising our issuer credit rating on Stara Zagora to
'BB+' from 'BB'.
     -- The stable outlook reflects our view that the city will be able to
address its infrastructure needs with only a gradual debt accumulation, and
without its liquidity position deteriorating.
Rating Action
On June 27, 2012, Standard & Poor's Ratings Services raised its issuer credit
rating on the Bulgarian city of Stara Zagora to 'BB+' from 'BB'. The outlook
is stable.
Rationale
The rating on Stara Zagora, the Republic of Bulgaria's (BBB/Stable/A-3)
sixth-largest city, is constrained by our view of the limited predictability
and high volatility of the city's budgetary performance; its restricted
expenditure flexibility; and low economic wealth levels. The rating is
supported by our view of Stara Zagora's relatively low debt burden and
contingent liabilities, its limited investment program--which has led to our
forecast of a strong budgetary performance for 2012-2014--and ongoing fiscal
decentralization that has led to greater flexibility around tax setting.

Stara Zagora's future budgetary performance has limited predictability, in our
view, because of the consolidating but uneven nature of the institutional
frameworks under which Bulgarian municipalities operate, their limited
expenditure flexibility, and the city's lack of experience in medium-term
budget planning.

In our view, budgetary predictability is also affected by the central
government's practice of adjusting transfers to local governments, or changing
the scope of delegated responsibilities unilaterally and at short notice.

Also, we view the city's spending flexibility as limited. Capital expenditures
are set to decline to below a modest 15% of own expenditures in our base-case
scenario for 2012-2014. The city's ability to curb operating expenditure
growth, after implementing temporary cuts implemented in 2010, is also limited.

Clarity about the city's future financial and debt indicators is clouded by
its financial management practices, which are weak in certain areas. This is
especially so for medium-term budgetary planning, as well as for liquidity and
debt policy. We believe that liquidity risks could increase were the city to
significantly increase its exposure to short-term borrowing from the Bulgarian
Fund for Local Authorities and Governments (FLAG).

Despite the projected economic growth, Stara Zagora's economic profile remains
weak in an international context. We estimate the city's GDP per capita to
have reached a modest US$6,900 in 2011. We assume that Stara Zagora's economy
will expand similar to the Bulgarian average. We expect the city's GDP to
increase by 0.7% in 2012, 2.0% in 2013, and 2.5% in 2014.

Despite the planning constraints, we expect the city will adhere to its
relatively small capital investment program and tight operating costs control
in 2012-2014. Combined with resumed economic growth, in our base-base scenario
we see an average annual solid operating surplus of about 8.3% of own
operating revenues, compared with 13.7% in 2011. Consequently, the city will
likely record a minor deficit after capital accounts of about 0.6% of own
revenues.

Nevertheless, the city's debt will grow faster as net borrowings will exceed
budget deficit. Following EU requirements, the city plans to implement
EU-sponsored projects via companies that will receive bridge financing in the
form of on-lending from the city's budget. This scheme will increase the
city's borrowing requirements, but its tax-supported debt, in our base-case
scenario, will not exceed a modest 40% of consolidated operating revenues by
year-end 2015.

Due to gradual decentralization, Stara Zagora may be able to improve its
budgetary performance by increasing taxes, albeit within nationally legislated
limits. We understand that local governments have the power to raise almost
all local taxes and charges; however, we don't envisage any such increases in
our base-case scenario.

Liquidity
We assess Stara Zagora's liquidity as neutral. This is because its average
cash on accounts, which now exceeds debt service falling due within next 12
months, remains volatile. We also view its access to external liquidity as
limited.

It has significantly improved its liquidity position. Between April 1, 2011
and April 1, 2012, its average cash on accounts reached Bulgarian lev (BGN)
6.8 million. In our base case, we expect the city's cash levels to remain
broadly the same during 2012, continuing to comfortably exceed its debt
service falling due within the next 12 months. We estimate this at about
BGN4.2 million, including the city's planned short-term bridge funding from
FLAG of about BGN2.5 million in 2012.

Nevertheless, we expect the city's liquidity position to remain volatile, as
its cash holdings are small and future exposure to short-term debt is
difficult to predict.

Stara Zagora's access to external liquidity also remains limited in the
context of Bulgaria's relatively weak banking sector and shallow capital
market. Standard & Poor's assigns a Banking Industry Country Risk Assessment
(BICRA) score of '7' to the Bulgarian domestic banking sector (1 being the
lowest risk, 10 being the highest; see "Banking Industry Country Risk
Assessments," published Aug. 8, 2011, on RatingsDirect on the Global Credit
Portal).

Recovery analysis
We rate Stara Zagora's senior unsecured debt at 'BB+'. The '3' recovery rating
on this debt indicates our expectation of a "meaningful" recovery (50%-70%) in
the event of a payment default.

Outlook
The stable outlook reflects our view that, due to economic recovery in
Bulgaria and widening revenue-raising capacity, the city will be able to
address its infrastructure needs with only a gradual debt accumulation and
without its liquidity position deteriorating. In our base-case scenario, we
assume the city will achieve consistent operating surpluses and modest
deficits after capital accounts during 2012-2014.

We could raise the rating within the next year if, in line with our upside
scenario, better cost controls and higher capital revenues pave the way for
very strong budgetary performance with consistent surpluses after capital
accounts and tax-supported debt below 30% of operating revenues in 2012-2014.

We could lower the rating within the next year if local economic growth
prospects significantly weakened, in line with our downside scenario, and if
the city's management failed to adjust its spending accordingly. This would
likely result in a shrinking operating surplus below 5% of own operating
revenues and widening deficits after capital accounts at about 5% of own
revenues. This scenario would lead to larger borrowings and, in turn, a weaker
liquidity position with cash coverage falling short of debt service within the
next 12 months.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.

Related criteria
     -- Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010

Related research
     -- Public Finance System Overview: Bulgarian Municipalities Continue
Fiscal Decentralization And Heighten Transparency, June 18, 2009.

Ratings List
Upgraded
                                        To                 From
Stara Zagora (City of)
 Issuer Credit Rating                   BB+/Stable/--      BB/Stable/--
 Senior Unsecured                       BB+                BB
  Recovery Rating                       3                 

Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.