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:
Moody's Deutschland GmbH
An der Welle 5
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Germany
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