Frankfurt am Main, October 08, 2019 -- Moody's Public Sector Europe (Moody's) has today upgraded the global
scale issuer ratings of 12 Czech regional and local governments (RLGs)
and one government-related issuer (GRI). At the same time,
Moody's has upgraded the national scale issuer ratings of five Czech
RLGs and one GRI and affirmed the national scale issuer ratings of three
RLGs. The outlook of all the entities' ratings has changed
to stable from positive, with the exception of City of Liberec where
the positive outlook was maintained.
Today's rating actions follow an improvement of the Czech Republic's
sovereign credit profile as captured by Moody's upgrade of the sovereign
rating to Aa3 with a stable outlook from A1 positive on 4 October 2019,
as well as idiosyncratic credit improvements. For additional information
on the sovereign rating action, please refer to the related announcement:
Specifically, Moody's has upgraded the following global scale issuer
ratings to Aa3 with a stable outlook from A1 positive: City of Prague,
City of Brno, City of Ostrava, and City of Prostejov.
The global scale issuer ratings of the cities of Trebic, Zdar nad
Sazavou and Uherske Hradiste were upgraded to A1 with a stable outlook
from A2 positive. For the City of Prague the senior unsecured debt
rating was upgraded to Aa3 from A1.
The global scale issuer rating of the City of Liberec was upgraded to
A3 positive outlook from Baa1 positive.
At the same time, the global scale issuer ratings of the following
regions were upgraded to A1 with a stable outlook from A2 positive:
South-Moravian Region, Moravian-Silesian Region,
Usti Region and Liberec Region.
Moody's has also upgraded the global scale issuer rating of the
GRI Sprava a udrzba silnic Pardubickeho kraje to A1 with a stable outlook
from A2 positive.
Moody's has upgraded Prague, Brno, Ostrava, and
Prostejov's baseline credit assessment (BCA) to aa3 from a1 and
the BCA of Trebic and Zdar nad Sazavou to a1 from a2. The BCA of
the City of Uherske Hradiste was upgraded to a1 from a3, while the
City of Liberec's BCA was upgraded to baa1 from baa2. The
BCA of the South-Moravian Region, Moravian-Silesian
Region, Usti Region and Liberec Region was upgraded to a1 from a3.
Concurrently, Moody's has upgraded the national scale issuer ratings
of the following RLGs and GRI: City of Prostejov (upgraded to Aaa.cz
from Aa1.cz); South-Moravian Region, Usti Region,
Liberec Region and Sprava a udrzba silnic Pardubickeho kraje (upgraded
to Aa2.cz from Aa3.cz); City of Uherske Hradiste (upgraded
to Aa2.cz from Aa3.cz) and affirmed the NSRs of Aa2.cz
of the cities of Trebic and Zdar nad Sazavou and the A3.cz of the
City of Liberec.
RATIONALE FOR UPGRADING THE RATINGS OF FOUR CITIES TO Aa3 FROM A1
The upgrade of the ratings of the cities of Prague, Brno,
Ostrava, and Prostejov follows the upgrade of the sovereign bond
rating, and reflects an improvement of their strong individual performances
in addition to their institutional, macroeconomic and financial
linkages to the national government. Moody's expects that the continued
economic growth of the national economy will further support tax revenue
growth of Czech RLGs.
Prague, Brno and Ostrava are the three biggest cities in the Czech
Republic and are characterized by their large and diversified economic
base. The upgrade of these cities' global scale ratings reflects
(1) their strong operating performances with average gross operating balance-to-operating
revenue ratio between 22% (Ostrava), 24% (Prague)
and 26% (Brno) over the last five years; (2) and declining
debt levels that are already considered low representing 20% of
Ostrava's operating revenue, 22% for Prague and 28%
for Brno at year-end 2018.
On the other hand, Prostejov is characterized by very conservative
budgetary management with strong operating margins at a high 24%
of operating revenue in 2018, zero debt and no plan to borrow in
the next two years.
RATIONALE FOR UPGRADING THE RATINGS OF THREE CITIES TO A1 FROM A2
The upgrade of the ratings of the cities of Trebic, Zdar nad Sazavou
and Uherske Hradiste also reflects their improving fiscal performances
in addition to their close institutional, macroeconomic and financial
linkages with the Czech government.
The ratings of all three cities are supported by their solid operating
margins varying between 16% (Zdar nad Sazavou) and 21% (Trebic)
of operating revenue at year-end 2018. With the sole exception
of Uherske Hradiste whose debt level was a low 32% of operating
revenue in 2018, the debt levels of other two cities averaged a
very low 10% of operating revenue, well below the sector
average. Finally, the accumulated cash reserves of all three
cities fully cover their outstanding debt.
RATIONALE FOR UPGRADING THE RATING OF THE CITY OF LIBEREC TO A3 FROM Baa1,
WHILE MAINTAINING THE POSITIVE OUTLOOK
The upgrade of Liberec's rating reflects the improvement of its
financial performance and debt metrics. The gross operating margin
of the city has significantly fallen to 7.5% operating revenues
in 2018, mainly due to one offs (higher repair costs and debt restructuring).
However we expect this metric to rebound to 10-12% in 2019-20.
Concurrently the debt burden has materially decreased to around 79%
of operating revenue from 120% in 2013 and liquidity levels improved
to 25% of operating revenue from 6% over the same period.
The positive outlook for Liberec reflects Moody's expectations that
performance, liquidity and debt metrics will continue to steadily
improve over the next few years thanks on sustained revenue growth and
tight grip on expenditures.
RATIONALE FOR UPGRADING THE RATINGS OF FOUR REGIONS TO A1 FROM A2
The upgrade of the ratings of South-Moravian Region, Moravian-Silesian
Region, Usti Region and Liberec Region primarily reflects an improvement
in the individual credit metrics such as the decline in debt level,
currently ranging from 5% (Region of Liberec) to 11% (South-Moravian
Region) of operating revenues and a gradual improvement in liquidity to
levels that fully cover direct debt at the end of the 2nd Quarter 2019.
In addition to this it takes into account the close institutional,
macroeconomic and financial linkages that exist between the Czech government
and Czech regions.
All Czech regions feature relatively stable financial performances despite
their very limited control over their revenue base, with the bulk
of the regions' operating revenues stemming from central government
transfers, in the form of earmarked grants for education and social
services, which account for approximately 64% of operating
revenues in 2018. Shared taxes, a national pool made up of
value added tax (VAT), personal income tax (PIT) and corporate income
tax (CIT) receipts, make up about 35% of the regions'
operating revenue with the remainder of operating revenues derived from
RATIONALE FOR UPGRADING THE RATING OF SPRAVA A UDRZBA SILNIC PARDUBICKEHO
KRAJE TO A1 STABLE FROM A2 POSITIVE
The upgrade of the rating of Sprava a udrzba silnic Pardubickeho kraje
(SUS PK) and the change of the outlook to stable reflect its status as
a GRI, wholly owned by the Pardubice Region (unrated) and the strong
institutional and financial linkages with its support provider.
Moody´s assesses the very high likelihood that the region would
provide timely support should the entity face acute liquidity stress.
RATIONALE FOR STABLE OUTLOOKS FOR 11 CZECH RLGs
The stable outlooks on the ratings of the 11 RLGs mirror the stable outlook
on the sovereign government bond rating. The outlooks reflect Moody's
expectations that financial and debt metrics will be preserved at the
current level or even improve thanks to sustained revenue growth and good
RATIONALE FOR UPGRADING OF THE NATIONAL SCALE RATINGS
The upgrade of the national scale ratings of five RLGs (Aaa.cz
of City of Prostejov), (Aa2.cz of City of Uherske Hradiste,
Liberec Region, South-Moravian Region, Usti Region),
reflects their improved operating performances, which strengthened
their self-funding capacity and ultimately let to financial surpluses.
The upgrade of the national scale ratings of Sprava a udrzba silnic Pardubickeho
kraje reflect the strengthening of the credit profile of the region of
Pardubice (unrated) due to the tight linkage between these entities.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material to the RLGs' and GRI's
Social considerations are not material to the RLGs' and GRI's
Governance risks are material to the Czech RLGs' ratings.
Prague, Brno and Ostrava utilize prudent financing planning which
allows for multi-year forecasting of key trends, providing
the cities with the ability to identify potential pressures and allows
for sufficient time to adjust plans accordingly to mitigate any credit
implications. Smaller cities, except Liberec, provide
transparent, timely financial reports and adhere to strict policies
on debt and investment management. A risk for the smaller cities
(Uherske Hradiste, Prostejov, Zdar nad Sazavou and Trebic)
is their reliance on a very small team, which could have a negative
impact on the credit profile in case the critical people decided to leave.
Aggressive financial management in the past has impacted the credit profile
of the city of Liberec, increasing its debt to very high levels.
However, the current administration practices a more balanced budget
which decreased the city´s debt over the last six years.
Regions historically display good governance practices, especially
in terms of transparency and disclosure, policy credibility and
Governance risks are material to Sprava a udrzba silnic Pardubickeho kraje
ratings. The governance framework is intrinsically intertwined
with the supporting government, which exerts strong oversight and
ultimately takes key decisions.
WHAT COULD CHANGE THE RATINGS UP/DOWN
A further strengthening of the Czech sovereign credit profile could lead
to upward rating pressure for regional and local governments.
For RLGs rated below the sovereign rating level, evidence of a given
entity's ability to display comparatively stronger credit fundamentals
could also exert upward rating pressure.
Although unlikely given the recent upgrade, a deterioration of the
sovereign credit profile could result in downward rating pressure.
A prolonged fiscal slippage causing a relevant growth in current debt
metrics could also negatively affect the ratings.
For the GRI a positive or negative change in the creditworthiness of its
support provider (the Region of Pardubice) will result in a concomitant
change of the existing ratings.
The sovereign action required the publication of this credit rating action
on a date that deviates from the previously scheduled release date in
the sovereign release calendar, published on www.moodys.com.
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: Czech Republic, Government of
GDP per capita (PPP basis, US$): 37,371 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3% (2018 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6%
Gen. Gov. Financial Balance/GDP: 0.9%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.3% (2018 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 04 October 2019, a rating committee was called to discuss the
rating of the Brno, City of; Liberec, City of; Liberec,
Region of; Moravian-Silesian, Region of; Ostrava,
City of; Prague, City of; Prostejov, City of;
South-Moravian Region; Trebic, City of; Usti,
Region of; Zdar nad Sazavou, City of; Uherske Hradiste,
City of; Sprava a udrzba silnic Pardubickeho kraje. The main
points raised during the discussion were: The systemic risk in which
the issuer operates has materially decreased. The issuer's fiscal
or financial strength, including its debt profile, has materially
The principal methodology used in rating Brno, City of; Liberec,
City of; Liberec, Region of; Moravian-Silesian,
Region of; Ostrava, City of; Prague, City of;
Prostejov, City of; South-Moravian Region; Trebic,
City of; Usti, Region of; Zdar nad Sazavou, City
of; Uherske Hradiste, City of was Regional and Local Governments
published in January 2018. The principal methodology used in rating
Sprava a udrzba silnic Pardubickeho kraje was Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.
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same series, category/class of debt, security or pursuant
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to rated entity, Disclosure from rated entity.
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