The outlook on Warsaw’s rating changes

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Warsaw. Fot. PZ Studio
Warsaw. Fot. PZ Studio

Moody’s has lowered the outlook on Poland’s credit rating from stable to negative (A2 on the international rating scale). This automatically leads to lowering the outlooks for national entities that share the country’s rating, including Warsaw.

The current change in Warsaw’s outlook from stable to negative has never happened before since the city started being assigned such ratings.

This change in outlook from stable to negative increases the risk of Poland’s, and thus Warsaw’s, decline in ratings. This might lead to relatively higher costs of external financing. We want to incur capital expenditures of over 10.5 billion zloty to support development, including the Metro, roads, schools and cultural institutions, by 2020,” said Hanna Gronkiewicz-Waltz, Mayor of Warsaw.

The first Moody’s rating was assigned to Warsaw on 20 December 2007 and it was A2 with a stable outlook. That was the highest possible rating for a Polish city, as the country’s rating sets the upper limit for the ratings of its entities (sovereign ceiling). From that time Warsaw’s rating and stable outlook have remained unchanged.

With the recent lowering of the outlook on Poland’s international rating, which is also affecting Warsaw, it should be stressed that the city has remained financially stable. The change in outlook was caused by external factors beyond the city’s control.

Consequences for Warsaw
The change in the country’s outlook from stable to negative increases the risk of lower rankings in the future. Taking into account the relationship between the rating and the margin added to external financing, it can be assumed that should the country’s rating be lowered in the future, then due to the resulting lowering of Warsaw’s rating, the issuance of new bonds or borrowing would entail higher payments to lenders/investors to cover the risk and relatively higher costs of servicing. For debt financing using bonds, Warsaw will specify its interest rates assuming a margin exceeding the benchmark, i.e. Treasury bonds. The costs of financing might increase along with the rise in the profitability of Treasury bonds. Each drop in the rating by 1 level usually causes an increase in financing costs by at least several base points (e.g. 10 base points = 0.1%).

Warsaw is beginning to implement the investment programme connected with the European Union’s 2014-2020 financial perspective. Between 2017 and 2020 the city is going to invest over PLN 10.5 billion in development (the Metro, roads, schools, cultural institutions). To obtain funds, including for its own contribution, Warsaw is planning to issue bonds or take out loans from international institutions, such as the EIB, in the amount of PLN 3.1 billion. A potential lower rating for Poland (and, as a consequence, Warsaw) might increase the costs of obtaining such financing.

Warsaw still stable
Warsaw’s stable financial situation is confirmed by satisfactory operational results, gradually-improving financial results, decreasing debt, a comfortable liquidity situation and the higher capability of generating income from taxes and local fees for a city with district rights, and sound financial management. The specific factors confirming Warsaw’s stability are the following:
•    stable operational results: the city’s operating surplus for the coming years equals about 6.5% of operating revenue,
•    significant capital expenditures: 16.4% of the total annual expenditures on average. In connection with preparing the city for investments under the 2014-2020 EU financial perspective, the city will continue to obtain considerable EU grants,
•    supporting liquidity buffer,
•    stabilised direct debt: Warsaw’s debt will remain low and will be lower than 50% of current income.

A well-developed economy and an affluent population make for further external factors that guarantee a stable financial situation in Poland’s capital city.

Warsaw has currently 6 issued series of bonds, including 5 traded on the stock exchange and one outside the public market. The total value of all issued bonds is PLN 2.2 billion. They are based on a constant interest rate. Moreover, in late 2015 the city’s debt on loans taken out in foreign institutions, such as the EIB and the Council of Europe Development Bank denominated in PLN was PLN 3.66 billion.

A change in the outlook will not affect the servicing costs of Warsaw’s previously-issued bonds, as the conditions of issuance do not change and the document remains as is for the entire period until purchase. The interest rate of the loans taken is also largely constant or based on WIBOR increased by a predefined margin. Moody’s lowered outlook for Poland and Warsaw will not affect the servicing costs of the current debt, as the conditions of financing have already been agreed on and cannot change.