Rating

June 2018: Moody’s upgrades the City of Ostrava’s rating to 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 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 - 2018

year

2002

2003 -2005

2006-2007

2008 - 2015

2016

2017

2018

rating

Baa1

A3

A2

A2

A2

A1

A1

outlook

-

stable

stable

stable

positive

stable

positive

Ostrava was awarded an A1 rating in June of last year (2017), with the outlook rated as stable. This April, Moody’s upgraded the City’s outlook from stable to positive. This step came after the agency upgraded the Czech Republic’s government bonds rating from stable to positive; it reflects the strong institutional, macroeconomic and financial links between local and national government. This means that Ostrava has the same rating as the Czech Republic itself, as well as the two largest Czech cities – Prague and Brno. Details are given in the table below.

Table: Czech cities with similar ratings to Ostrava

City

Moody’s rating

Prague

A1/ positive

Brno

A1/ positive

Ostrava

A1/ positive

Moravian-Silesian Region

A2/ positive

Czech Republic

A1/ positive

Source: www.moodys.com/31.7.2018

Moody’s based its evaluation 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.

The renewed A1 rating confirmed that Ostrava is economically and financially stable, and that the City is able to meet its financial obligations with a high degree of reliability.

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, expressed in the ratio of gross operating balance to operating income,

₋         large surpluses achieved during the past two years, boosting the City’s cash reserves,

₋         a continuing decline in overall debt levels thanks to the City’s prudent capital expenditure plans; as of 31 December 2017 the City’s debt had fallen to 25.2% of current income – i.e. below the average level of municipal debt in the Czech Republic, and a relatively low level of debt in international comparison.

In 2017 the City of Ostrava achieved a solid net operating result totalling 22.3% of its current income; this is approximately the average for Czech cities. It represents a slight fall compared to 2016 (when the City achieved 26%), but it remains relatively high in comparison with 2013–2014 (average 14.6%).

The large surpluses achieved during the past two years have boosted the City’s cash reserves – reaching 28.9% of current income at the end of 2017 (compared with 27.1% in 2016). As a result, the level of funds needed to service the City’s debts (5% of operating income in 2017) does not represent a problem for municipal finances.

In the mid-term, Ostrava’s strong operating results, increased cash reserves and prudent capital expenditure will enable the City to continue reducing its level of debt. At the end of 2017 the City’s direct and indirect debt had fallen to 25.2% of its current expenditure (compared to 31.2% in 2016). By the end of 2018, Ostrava’s debt is set to fall to around 20% of current income; this is below the average level of Czech cities, and it is also less than most A1-rated cities. The table shows the decrease in the City’s direct debt since 2013.

Table: Direct debt of the City of Ostrava 2013 - 2017

 

2013

2014

2015

2016

2017

 Direct debt (CZK millions)

6 604

3 781

3 433

3 033

2 582

 

The table below shows Ostrava’s capital expenditure in the period 2013–2017. 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 was an increase in capital expenditure during 2017; however, this expenditure is mainly covered by the City’s own reserves, which have been gradually built up as a result of its prudent financial management. This slight increase is also reflected in the indicator of capital expenditure as a percentage of the City’s total expenditure; in 2017 this figure was 18.2% (compared to 2016 17.2% in 2016).

Table: Capital expenditure of the City of Ostrava 2013 - 2017

 

2013

2014

2015

2016

2017

Total

Capital expenditure   (CZK millions)

3 255

2 839

2 139

1 433

1 688

11 354

 

Moody´s rating analysis