Rating

May 2019: In its annual update, Moody’s confirms the City of Ostrava’s rating A1/positive

A credit rating is an evaluation of an institution’s economic quality, reflecting its ability to meet all its financial obligations on time and in full. Credit ratings are issued by independent rating agencies, each using its own rating scale to express the institution’s overall creditworthiness. When issuing a long-term rating, the outlook for the institution is also evaluated; this expresses the direction in which the rating is most likely to move (usually in the mid-term). An institution’s rating can have an impact on the cost of its borrowing on financial markets (bonds, promissory notes, loans).

Credit ratings have been issued for the City of Ostrava since 1996. In the past, the City has been rated by two independent agencies (Moody’s, Standard & Poor’s). Currently the City is rated by Moody’s.

Moody’s has issued ratings for the City of Ostrava since 1997. From 1997 to 2001 the City was rated for debt securities, and from 2002 onwards it has been rated as an issuer of municipal bonds. The Moody’s ratings have improved steadily over this period – from Baa1 (1997–2002) to the current rating A1 (see the table below).

Table: Moody’s ratings of the City of Ostrava 2002 - 2019

year

2002

2003 - 2005

2006 - 2007

2008 - 2015

2016

2017

2018

 2019

rating

Baa1

A3

A2

A2

A2

A1

A1

 A1

outlook

-

stable

stable

stable

positive

stable

positive

 positive

The City of Ostrava has the same rating as the Czech Republic (A1/positive); this is the highest possible rating the City can currently achieve. If the Czech Republic’s rating is increased in the future, Ostrava’s rating could also increase – provided that the City continues to post good financial results and maintains medium to low debt levels.

The table below shows the current rating of the Czech Republic, the three largest Czech cities and the Moravian-Silesian Region (taken from the Moody’s website).

Table: Ratings of Prague, Brno, Ostrava, the Moravian-Silesian Region and the Czech Republic

City

Moody’s rating

Prague

A1/ positive

Brno

A1/ positive

Ostrava

A1/ positive

Moravian-Silesian Region

A2/ positive

Czech Republic

A1/ positive

Source: Moody’s (July 2019)

Moody’s based its renewal of Ostrava’s A1 rating on a detailed audit of the City’s financial management and operations over the course of the previous year, its current financial situation and the overall financial outlook in the context of economic, political, demographic and other circumstances.

 Ostrava’s renewed A1 rating reflects a number of factors:

₋         strong operating results, supported by an increase in tax revenues and strict controls on spending,

₋         ample cash reserves,

₋         a low level of debt, partly thanks to the City’s prudent capital expenditure plans,

₋         the City’s manageable debt service in the mid-term (slightly above average).

 The rating outlook is positive, reflecting the City’s improving financial results, decreasing debt levels and adequate liquidity. Moody’s expects that Ostrava will continue to control its expenditure and (partly thanks to increasing volumes of tax revenue) to achieve solid operating results in the upcoming two years.

In 2018 the City of Ostrava achieved a gross operating result totalling 21.7% of its operating income; this is approximately the average for Czech cities. It represents a slight fall compared with 2017 (when the City achieved 22.3%), but it remains relatively high in comparison with 2014 (15.5%).

The large surpluses achieved during the past two years have helped to boost the City’s cash reserves – reaching a comfortable 37.6% of operating income at the end of 2018 (compared with 28.9% in 2017). Although Ostrava’s cash reserves are slightly below the average for comparable cities, they nevertheless provide a useful cushion to cover any sudden budgetary changes or pre-financing of capital expenditure in the mid-term. As a result, the level of funds needed to service the City’s debts (5% of operating income in 2018) does not represent a problem for municipal finances.

In the mid-term, Ostrava’s solid operating results, increased cash reserves and prudent capital expenditure will enable the City to continue reducing its level of debt. At the end of 2018 the City’s direct and indirect debt had fallen to 20% of its current expenditure (compared with 25.2% in 2017). Ostrava’s direct debt has been decreasing consistently since 2014 (see the table below).

Table: Direct debt of the City of Ostrava 2014 - 2018

 

2014

2015

2016

2017

2018

 Direct debt (CZK millions)

3 781

3 433

3 033

2 582

2 127

The table below shows Ostrava’s capital expenditure in the period 2013–2018. The higher capital expenditure in 2013–2014 was due to the City’s receipt of credit from the European Investment Bank and funding from subsidy programmes. In 2015 and 2016 the last funding was received from these external sources, and the related projects reached completion. There has been an increase in capital expenditure during 2017 and 2018; however, this expenditure is mainly covered by the City’s own reserves, which have been gradually built up as a result of its consistently prudent financial management. This increase is also reflected in the indicator of capital expenditure as a percentage of the City’s total expenditure; in 2018 this figure was 21.7%, and in 2017 it was 18.2%.

Table: Capital expenditure of the City of Ostrava 2013 - 2018

 

2013

2014

2015

2016

2017

2018

Capital expenditure   (CZK millions)

3 255

2 839

2 139

1 433

1 688

2 302

 

Moody´s rating analysis