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Rating Action:

Moody's affirms B2 ratings on Turkish cities of Istanbul and Izmir with negative outlook

08 Dec 2021

Frankfurt am Main, December 08, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the B2 long-term issuer and senior unsecured debt ratings of the Metropolitan Municipality of Istanbul and the B2 long-term issuer ratings assigned to the Metropolitan Municipality of Izmir. At the same time, Moody's has downgraded the National Scale long-term issuer rating of Izmir to A1.tr from Aa3.tr. The outlooks on both municipalities remain negative.

Today's rating action follows the affirmation of the Turkish government's B2 bond rating with negative outlook. For further information, refer to the sovereign press release: https://www.moodys.com/research/--PR_458469

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATIONS

Today's rating action reflects the cities' record of persistently strong operating performance, which is continuing despite the pandemic crisis thanks to strong tax revenue dynamics fueled by growing economies, high tax generation capacity and flexibility to withstand adverse development. It also takes into account the cities' huge investment needs over the next years to sustain rapid urbanization.

Both cities displayed strong gross operating balances (GOB) in 2020, with the City of Istanbul posting an improved GOB of 33% of operating revenue from 28% a year before, while Izmir's GOB remained overall stable at 43% of operating revenue. In 2021, Moody's expects strong increases in tax revenues benefitting from this year's extraordinary real GDP growth rate of 9%. Inflation-adjusted operating expenditures growth has remained under control (except interest costs), despite increased responsibilities due to the coronavirus pandemic, which will continue to put pressure on cities' finances. As a result, Moody's expects the City of Istanbul to maintain its strong GOB at around 30% of operating revenue, while Izmir will post a stronger operating performance, with GOB at 45% of operating revenue.

These levels of operating balances provide a good funding source for Istanbul and Izmir's traditionally very high capital expenditures. However, the cities' huge investment needs driven by the fast population growth and rapid urbanization translate into growing pressure on their finances, resulting in financing deficit-to-total revenue ratio of 9.4% for Istanbul and 21.5% for Izmir in 2020, a trend which is expected to continue in 2021 and 2022.

The rating affirmation also takes into account Istanbul and Izmir's robust and diversified economic bases contributing 30% and 8% to the national GDP, respectively, with wealth levels well above the national average that enable them to rely on a relatively stable tax revenue base and remain resilient to adverse economic shocks. In addition, both cities have large asset bases, which could help mitigate potential pressure on their finances in the medium term in case of need.

Istanbul and Izmir are rated on par with the Turkish government bond rating of B2 negative. Due to their close institutional, financial and operational linkages with the Turkish government, Istanbul and Izmir cannot act independently of the sovereign and do not have enough financial flexibility to permit their credit quality to be stronger than that of the sovereign. In Moody's view, the current operating environment, which is marked by high inflation and currency volatility, constrain the predictability and stability of Istanbul and Izmir's revenue raising powers and service responsibilities.

The B2 ratings incorporate a Baseline Credit Assessment (BCA) of b2 assigned to the cities of Istanbul and Izmir.

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOKS

The negative outlook on both cities reflects their high and growing debt with high FX exposures.

Istanbul and Izmir will further increase their debt levels during 2021-22, ranging from 100% to 110% of operating revenue, respectively. Both cities display very high exposure to FX, with Istanbul and Izmir having respectively around 80% and 75% of their direct debt stock denominated in foreign currency. The growing fiscal pressure stemming from Turkish lira depreciation - by nearly 30% since the central bank started to ease monetary policy in September - has an impact on the cities' debt increase and growing debt servicing costs, which reduces their debt affordability.

The negative outlook also mirrors the outlook of the Government of Turkey.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Istanbul and Izmir's ratings. Istanbul and Izmir's main risks relates to high level of carbon intensity and greenhouse gas emissions within their economies.

Social considerations are material to Istanbul and Izmir's ratings. Both cities have a favourable demographic profile, but with the fast-growing population and recent expansion of the cities' boundaries, the overall provision of services to the population falls short of the standards in most OECD countries.

Governance risks are material to Istanbul and Izmir's ratings. Istanbul and Izmir have shown an ability to manage complex projects in the rapidly growing cities and provide services within the metropolitan areas with a population of 15 million and 4.5 million, respectively. Their debt management has an impact on cities' profile, mainly due to exposure to foreign currency risk.

The specific economic indicators, as required by EU regulation, are not available for these entities. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Turkey, Government of

GDP per capita (PPP basis, US$): 30,449 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.8% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 14.6% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -4.2% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.9% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: ba2

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

SUMMARY OF MINUTES FROM RATING COMMITTEE

On 02 December 2021, a rating committee was called to discuss the rating of the Istanbul, Metropolitan Municipality of; Izmir, Metropolitan Municipality of. The main points raised during the discussion were: The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed.

The sovereign action on Turkey published on Friday 3 December 2021 required the publication of these credit rating actions on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of the cities' ratings will require a similar change in Turkey's sovereign rating provided that the cities show improving financial and debt metrics.

A deterioration of the sovereign credit strength would apply downward pressure on Istanbul and Izmir's ratings given the close financial and operational linkages with the central government.

Downward ratings pressure may arise from a sustained growth in debt and debt servicing costs, triggered by further currency depreciation and the knock-on effect from outstanding FX-debt. Any concern in access to funding sources would also trigger a negative rating action.

The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gjorgji Josifov
Asst Vice President - Analyst
Sub-Sovereign Group
Moody's Deutschland GmbH, Czech branch
Washingtonova 17
110 00 Praha 1 (Prague 1)
Prague
Czech Republic
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mauro Crisafulli
MD-Sub Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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Client Service: 44 20 7772 5454

No Related Data.
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