Рейтинг на Варна - 27 юни 2012



TEXT-S&P revises Varna, Bulgaria outlook to positive

Wed Jun 27, 2012 12:00pm EDT
June 27 - Overview
     -- Economic revival and authorities' commitment to increasing tax
collection rates should augur well for the Bulgarian city of Varna, and its
already-strong operating performance.
     -- Likely delays in the implementation of its capital investment program,
and a gradual shift to long-term funding from short-term bridge financing, may
also improve the city's liquidity position.
     -- We are therefore revising our outlook on Varna to positive from
stable, reflecting our view that projected revenue growth combined with
authorities' adherence to cautious spending policy may strengthen Varna's
budgetary performance and improve its liquidity position.
     -- We are affirming our issuer credit rating on Varna at 'BB'.
Rating Action
On June 27, 2012, Standard & Poor's Ratings Services revised its outlook on
the City of Varna to positive from stable. At the same time, we affirmed our
issuer credit rating on Varna at 'BB'.
The ratings on the City of Varna, the Republic of Bulgaria's (BBB/Stable/A-3)
third-largest city, are constrained by the limited predictability of its
financial policy, refinancing risk due to a growing reliance on short-term
debt, and low expenditure flexibility from high infrastructure needs and
operating spending pressure.

The ratings benefit from Varna's strong operating budgetary performance (which
we believe will continue), the gradual fiscal decentralization in Bulgaria
that has increased local government autonomy in managing revenues, and its
still-moderate although growing debt levels.

Bulgaria's consolidating but uneven institutional framework, combined with
Varna's exposure to real estate volatility, its nascent long-term financial
planning, and its inclinations toward large-scale infrastructure development
constrain the predictability of its financial and debt performance.

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.

The city remains exposed to the real estate sector, although the contribution
of property transfer tax has almost halved since 2008 and accounted for about
15% of own revenues in 2011.

Besides the lack of clarity around the city's medium-term financial policies,
we also view its financial management as a rating weakness. The city is
exposed to refinancing risks because of its relatively low cash reserves,
coupled with its reliance on short-term bridge financing and a lack of
external risk assessment.

During the economic crisis of 2009-2010, however, the city demonstrated its
ability to control spending to match shrinking revenues. Nevertheless, we
assume that those cuts have now largely exhausted the city's expenditure
flexibility. In our base-case scenario, budget pressures will continue to rise
in 2012-2014. The city also plans to embark on a large-scale capital
investment program worth about Bulgarian lev (BGN) 260 million (EUR130 million)
focused on public transport, waste water treatment, and waste disposal.

Positively, the city has managed to improve tax revenue collection. Combined
with resumed economic growth and continued cost controls, this should result
in a strong operating performance. In our base case, we forecast the city's
economy to grow by 2.7% per year during 2012-2014, leading to an operating
surplus as a percentage of own operating revenues at a sound 15.7%.

However, persistently high infrastructure needs during the 2012-2014 will see
a projected average deficit after capital accounts of negative 7.2% of Varna's
own revenues. In our base case we consequently forecast that Varna's
tax-supported debt as a percentage of consolidated operating revenues will
increase to 73.5% in 2014 from 63.5% in 2011.

We view Varna's improved revenue flexibility in recent years as positive for
the rating. The improvement has come partly because of the central government
giving Bulgarian municipalities greater autonomy to set local tax rates.

We assess Varna's liquidity as negative. In our base-case scenario we assume
that in 2012-2013 the city's cash available on accounts will average about
80%-90% of its debt service falling due within next 12 months. We view its
access to external liquidity as limited.

Over 2011, the city has managed to improve its cash position. We believe that
over the next 12 months it will average about BGN17 million (EUR8.5 million),
which should cover about 90% of its projected debt service falling due.

Nevertheless, the city's own cash, which can be used at its discretion,
significantly decreased to less than BGN1 million over first-quarter 2012.
This may restrict the city's cash management. The bulk of Varna's available
cash currently comprises cash dedicated to state-delegated responsibilities,
which the city can use as soon as these are adequately funded.

As the city plans to take on short-term Fund for Local Authorities and
Governments (FLAG) loans to bridge the financing of its EU-sponsored projects,
its liquidity position will remain constrained during 2012-2015, in our base

In our view, this source of funding risks a timing mismatch between the
transfer of EU funds to Varna via the central government, and the scheduled
repayment of loans from FLAG. Under Standard & Poor's criteria, any late
payment on FLAG loans constitutes a payment default. Nevertheless, we note
that FLAG is ready to extend the maturities of its loans without incurring
additional fees if the EU funds come later than scheduled.

Varna's access to external liquidity remains limited, in our view, because of
Bulgaria's relatively weak banking sector and shallow capital market. Our
Banking Industry Country Risk Assessment (BICRA) classifies Bulgaria's banking
sector as group '7'. A BICRA reflects the strengths and weakness of a
country's banking industry relative to other countries', on a scale of one to
10, with group '1' representing the lowest risk and group '10' the highest
(see "Banking Industry Country Risk Assessments," published Aug. 8, 2011, on
RatingsDirect on the Global Credit Portal).
Recovery analysis
Varna's senior unsecured debt is rated 'BB'. The '3' recovery rating on this
debt indicates our expectation of a "meaningful" recovery (50%-70%) in the
event of a payment default.

The positive outlook reflects our view that projected revenue growth due to
better tax collection and an increasing tax base, combined with the
authorities' adherence to cautious spending policies, may strengthen Varna's
budgetary performance and limit its recourse to short-term borrowings. This
would improve its liquidity position.

We may raise the ratings over the next year, if, in line with our upside
scenario, the city were to stabilize its average liquid assets at a level
consistently above its debt service falling due within the next 12 months,
partly because of more gradual implementation of its investment program.
Alternatively, we may raise the rating if faster revenue growth saw the city's
deficit after capital accounts fall below 5% of revenues on average in

We may revise the outlook back to stable within the next 12 months if, in line
with our base-case scenario, the city increased its reliance on short-term
debt such that debt service stabilized at a high 17% of operating revenues on
average over the 2012-2014, without a corresponding accumulation of liquid
assets available for debt repayment.

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

Ratings Affirmed; CreditWatch/Outlook Action
                                       To                 From
Varna (City of)
 Issuer Credit Rating                  BB/Positive/--     BB/Stable/--

Ratings Affirmed

Varna (City of)
 Senior Unsecured                       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