Frankfurt am Main, February 11, 2022 -- Moody's Investors Service ("Moody's") has today
upgraded the global and national scale long-term issuer ratings
for the City of Liberec to A1/Aa3.cz from A2/A1.cz,
upgraded its Baseline Credit Assessment (BCA) to a2 from a3 and changed
the outlook to stable from positive.
RATINGS RATIONALE
The upgrade of Liberec's ratings to A1/Aa3.cz reflects strengthening
governance and management practices, improving financial performance
and liquidity position.
Liberec's governance and management have improved over the past
3 years. Cautious budgetary planning, and in particular the
rationalisation of operating expenditures, resulted in an improvement
of the city's operating performance to a sound 15.2%
of operating revenues in 2021 from 12.6% in 2019,
despite the negative effects induced by pandemic situation on tax revenues.
The city's administration managed to cut down by 6.2%
operating expenses, particularly in the less rigid areas of purchased
services and payments to affiliate entities, to match with reduced
tax revenues.
Moody's believes that the administration will continue to display
prudent budgeting and focus on the rationalization process over the next
few years, thus preserving sound operating margins. Tax revenues
are anticipated to increase year on year following a 4% GDP growth
at national level and operating expenditures should follow at a slightly
faster rate resulting in a still robust operating margin of 14.3%
in 2022.
Over the last few years Liberec's net direct and indirect debt (NDID)
continued to steadily decline, reaching 70% of operating
revenues in 2021 from 100% in 2015. Moody's expects
the NDID will further decrease to 62% and 55% in 2022 and
2023, respectively but will remain above the average of 27%
of rated peers in the Czech Republic. Moody's projects the
city's NDID to pick up slightly from 2024 onward as a result of
a new investment cycle.
The administration successfully refinanced part of its debt in 2021 with
positive impact on interest costs, annual debt service and maturity
prolongation, all of which had a positive effect on the city's
operating performance and liquidity position. Noteworthy the interest
burden is expected to significantly shrink to around 2.6%
of operating revenue in 2022 from 3.5% in 2019.
Good financial performances and the postponement of some investments led
to a progressive accumulation of liquidity which significantly improved
over the past 3 years. Capital expenditures reached CZK 442 million
in 2021 (17.4% of total expenditures), significantly
below the budgeted CZK 662 million. Moody's projects the
capital expenditures share in total expenditures to remain contained in
2022 as the key investment project for swimming pool reconstruction is
postponed to 2023-24. Current liquidity position is strong,
representing about 34% of operating revenues in 2021. Moody's
expects it to rise to 40% of operating revenues or 65% of
NDID in 2022.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectations that Liberec will
maintain strong liquidity position and preserve its sound gross operating
balance in 2022-23 thanks to conservative financial management.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Liberec's ESG Credit Impact Score is neutral-to-low (CIS-2),
neutral to low exposure to environmental, social and governance
risks.
Environmental considerations are not material to Liberec's rating.
Issuer profile score is neutral to low (E-2), reflecting
low exposure to physical climate, water management and waste and
pollution risks.
We assess Liberec's social issuer profile score as neutral to low (S-2),
reflecting contained exposure to social risks across most categories.
Good access to basic services, reasonable access to education,
health care institutions and affordable housing drive the low exposure
to these risks.
Liberec's solid institutions and governance profile is captured by a neutral
to low G issuer profile score (G-2). The management shows
a conservative approach with solid governance and management practices.
Liberec publishes transparent and timely financial reports.
The specific economic indicators, as required by EU regulation,
are not available for this entity. 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$): 40,793 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -5.8% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.4%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -5.6%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 3.6% (2020 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Economic resiliency: a1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 08 February 2022, a rating committee was called to discuss the
rating of the Liberec, City of. The main points raised during
the discussion were: The issuer's fiscal or financial strength,
including its debt profile, has materially increased
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on Liberec's ratings could result from one or the
combination of the following: (1) strengthened liquidity position;
(2) substantial reduction in Liberec's debt burden and (3) further
improvement of operating performance. In addition, an upgrade
in the Czech government rating could also potentially lead to an upgrade
in the city's ratings provided its financial metrics are maintained.
A downward pressure on the city's ratings could occur in case of
material reduction in operating margins and significant increase in debt
levels. In addition, a downgrade of the Czech government
rating could also exert downward pressure on the ratings.
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
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same series, category/class of debt, security or pursuant
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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
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These ratings are unsolicited.
a.With Rated Entity or Related Third Party Participation:
YES
b.With Access to Internal Documents: YES
c.With Access to Management: YES
For additional information, please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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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.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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
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the lead rating analyst and to the Moody's legal entity that has issued
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for additional regulatory disclosures for each credit rating.
Irena Krizkovska
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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