Frankfurt am Main, September 15, 2020 -- Moody's Public Sector Europe ("Moody's") has today downgraded to B2 from
B1 the long-term issuer ratings of the Metropolitan Municipalities
of Istanbul and Izmir. The National Scale Rating on Izmir has been
downgraded to Aa3.tr from Aaa.tr. The rating outlooks
on both municipalities' ratings remain negative.
Today's rating action follows the weakening of the Turkish government's
credit profile, as captured by Moody's recent decision to downgrade
Turkey's government bond ratings to B2 from B1 and to maintain the
negative outlook. For further information, refer to the sovereign
press release: https://www.moodys.com/research/--PR_431146.
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADES
Moody's assessment of both cities' baseline credit assessments (BCAs)
has been changed to b2 from b1, mainly reflecting the two cities'
exposure to increased systemic risk reflected in Turkish sovereign rating.
Due to their close institutional, financial and operational linkages
with the Turkish government, metropolitan municipalities,
including 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. Therefore, Istanbul
and Izmir are rated on par with the Turkish government bond rating of
B2 negative.
Moody's expects a significant impact on financial results in 2020
and 2021 from weaker revenues but also additional cost related to the
coronavirus pandemic. Both cities have only limited cash reserves
and significant exposure to foreign currency debt, which is exposing
them to additional risk. Against this backdrop, Izmir and
Istanbul still display robust operating performance, predictable
shared taxes paid by the government and large and diversified economic
bases, which should help mitigate the pressures on their budgets.
Istanbul's B2 rating reflects its large and diversified economy,
a still robust operating performance, although expected to weaken
in 2020, a high self-funding capacity and valuable asset
base, which provides fiscal flexibility to accommodate budgetary
pressure. On the other hand, Istanbul's rating is constrained
by its relatively high burden, which will remain elevated during
2020-21, and the upward pressure on debt servicing costs
given the city's significant exposure to foreign currency debt and
the depreciation of the Turkish lira.
Izmir's B2 rating reflects its very high and stable operating balance,
although it is expected to weaken this year, and its large economic
base in the country. At the same time, the rating is constrained
by the moderately high indirect debt of municipal-related entities
and the city's significant exposure to foreign currency debt and the depreciation
of the Turkish lira.
RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOKS
The negative outlook on both cities reflects their budgetary challenges,
the increasing exposures to FX debt and the reduction in the debt affordability.
It also mirrors the outlook of the Government of Turkey.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
In Moody's assessment, both RLGs' exposure to environmental
and social risks are not material.
Governance considerations are material to Istanbul's and Izmir's
credit profile. Moody's considers overall governance risk
as moderate to high, mainly due to significant exposure to foreign
currency risk.
The specific economic indicators, as required by EU regulation,
are not available for the Metropolitan Municipality of Istanbul and Metropolitan
Municipality of Izmir. 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$): 28,268 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 13.5%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -4.5%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.2% (2019 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 10 September 2020, 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 systemic risk in which the issuer operates
has materially increased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A downgrade of Turkey's sovereign rating would lead to a downgrade of
the two cities' ratings. For both Istanbul and Izmir, a strained
liquidity situation, including concerns around access to funding
sources, could trigger a downgrade. Similarly, for
both cities, downward ratings pressure may also arise from a sustained
growth in debt and debt servicing costs.
An upgrade of the two cities' ratings is unlikely given the negative outlook.
An upgrade of Turkey's sovereign rating may exert positive pressure,
provided that both cities also display improved financial metrics.
The sovereign action on Turkey published on Friday 11 September 2020 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.
PRINCIPAL METHDOLOGY
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_1216309.
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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Harald Sperlein
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mauro Crisafulli
Associate Managing Director
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
