Home Ratings and Research Currently valid ACRA Europe affirms unsolicited rating of BBB- to SKALICA, downgrades outlook to Negative
ACRA Europe affirms unsolicited rating of BBB- to SKALICA, downgrades outlook to Negative
Friday, 29 November 2019

ACRA Europe has affirmed the unsolicited rating assigned to the city of Skalica (hereinafter, the City) primarily based on the assessment of financial factors.

In that assessment, the results of the operating balance analysis show a very low level of surpluses, which are the base for the City's future development and debt repayments. The assessment considers the results of the debt analysis, in particular, the debt service risk and liquidity risk. ACRA Europe has made adjustments to the rating outlook given the expected deterioration of the following critical factors:

- The current budget surplus for 2019 is expected to decrease by half compared to planned values;

- Debt repayments are expected to exceed the planned current budget surplus for 2019 by 4x, forcing the municipality to cover the debt service using other budget resources.

Rating components

Institutional Factors
Governance and Fiscal Flexibility Moderate
Budgetary and Management Performance High
Political Environment High
Transparency Very high
Final assessment  High
Financial Factors
Debt Profile Very high
Liquidity Profile Moderate
Operating Balance Low
Regional Economy High
Final assessment High
Extraordinary Support
Final assessment High
Overall score High
Final rating BBB-

Outlook: Negative

The Negative outlook has been assigned based on the expected high risk of a debt ratio increase, low levels of short-term liquidity, and a very low level of current (operating) balance surpluses.

The Negative outlook assumes that the rating will most likely change within the 12-month horizon.

Key assumptions

• Indebtedness not increasing significantly compared to levels projected for 2019;

• Short-term liquidity remaining above levels projected for 2019;

• Operating balance surplus remaining above levels projected for 2019.

Potential outlook and/or rating change factors 

A positive rating action may be prompted by:

• Significantly lower debt levels than forecasted for 2019;

• Significant increase in the operating balance surplus to more than twice the debt service in 2019;

• Significant improvement in short-term liquidity ratio compared to 2018;

• Significant improvement in macroeconomic development in the Slovak Republic.

The likelihood that the positive rating action factors will be fulfilled during the rating period is considered to be low.

A negative rating action may be prompted by:

• Significantly higher debt levels than projected for 2019;

• Significant deterioration of liquidity indicators compared to 2018;

• Operating balance deficit in 2019.

The likelihood that the negative rating action factors will be fulfilled during the rating period is considered to be medium.

In ACRA Europe's complementary assessments, an extraordinary support analysis with the sovereign rating are also taken into consideration. The full rating report in Slovak is available here.

Appendix 1. Budget Execution Reports for 2016–2018 in thous. EUR

Budget item Execution Dec 31, 2016 % Execution Dec 31, 2017 % Execution Dec 31, 2018 %
Current income total 13,570 103% 13,834 98% 15,307 101%
  Tax income 7,634 105% 7,730 99% 8,648 101%
  Non-tax income 2,341 108% 2,345 98% 2,556 103%
  Grants and subsidies 3,595 96% 3,759 98% 4,103 99%
Current expenditure total 12,271 98% 13,137 98% 14,198 98%
  Interest expenses 205 91% 189 96% 171 96%
Current account surplus/deficit 1,299 x 697 x 1,109 x
Capital income total 1,199 59% 1,582 74% 2,191 83%
  Income of property sold 332 63% 272 70% 1,061 86%
  Capital grants and subsidies 867 58% 1,310 75% 1,130 80%
Capital expenditure total 953 33% 3,842 91% 3,185 92%
Capital account surplus/deficit 246 x - 2,260 x - 994 x
Financial operations, income 973 47% 3,063 84% 2,073 85%
  Loans from banks 199 100% 2,446 84% 1,934 85%
Financial operations, expenditures 1,901 100% 1,426 63% 1,774 80%
  Principal payments 1,601 100% 1,426 63% 1,774 80%
Financial account surplus/deficit - 928 x 1,637 x 299 x
TOTAL  INCOME 15,742 91% 18,480 93% 19,571 97%
TOTAL  EXPENDITURE 15,125 87% 18,405 93% 19,157 95 %
TOTAL BUDGET SURPLUS/DEFICIT  518 x 50 x 414 x

Sources: 2016-2018 Budget execution reports for the city of Skalica, ACRA Europe's calculations

Appendix 2. Balance Sheet for 2016–2018 in thous. EUR

Balance item Dec 31, 2016 Dec 31, 2017 Dec 31, 2018
Assets      
Fixed Assets: 66,790 65,361 66,604
  Intangible assets 68 64 60
  Tangible assets 47,226 48,187 49,434
  Long-term financial assets 19,496 17,110 17,110
Short-term assets: 8,393 7,441 7,524
  Stock 1 1 1
  Settlements 7,077 6,807 6,590
  Long-term receivables  3 3 3
  Short-term receivables 470 296 219
  Cash and equivalents 842 334 711
  Repayable financial assistance 0 0 0
Accruals 10 8 2
TOTAL ASSETS 75,193 72,810 74,130
Liabilities      
Equity/Funds 44,037 41,503 42,629
Liabilities 14,165 14,092 14,638
  Long-term liabilities 8,686 9,882 11,026
  Short-term liabilities 1,669 982 1,007
  Reserves 4 12 2
  Bank loans and financial assistance 3,707 3,192 2,557
  Settlements 99 24 47
Accruals 16,991 17,215 16,864
TOTAL LIABILITIES 75,193 72,810 74,130

Sources: 2016-2018 Financial statements for the city of Skalica, ACRA Europe's calculations

Appendix 3. Multiannual City Budget for 2019–2021 in thous. EUR

Budget item Budget for 2019 (after changes) Budget for 2020 Budget for 2021
Current income total 16,185 15,715 15,809
  Tax income 9,331 9,064 9,158
  Non-tax income 2,669 2,542 2,542
  Grants and subsidies 4,185 4,109 4,109
Current expenditure total 15,450 14,072 14,066
  Interest expenses 1,950 179 179
Current account surplus/deficit 735 1,643 1,743
Capital income total 1,095 424 424
  Income of property sold 16 30 30
  Capital grants and subsidies 1,079 394 394
Capital expenditure total 2,455 1,880 1,880
Capital account surplus/deficit  - 1,360 - 1,456 - 1,456
Financial operations, income 3,588 1,875 1,875
  Loans from banks 3,175 1,875 1,875
Financial operations, expenditures 2,956 2,059 2,074
  Principal payments 2,956 1,876 1,891
Financial account surplus/deficit 632 - 184 - 199
TOTAL  INCOME 20,868 18,014 18,108
TOTAL  EXPENDITURE 20,861 18,011 18,020
TOTAL BUDGET SURPLUS/DEFICIT  7 3 88

Sources: 2019-2021 Multiannual budget forecast for the city of Skalica, ACRA Europe's calculations

Appendix 4. List of Material Data Sources

Internal data sources External data sources
Budget execution reports for 2016, 2017, and 2018 Ministry of Finance of the Slovak Republic
Balance sheet for  Dec 31, 2016,  Dec 31, 2017, and  Dec 31, 2018 Statistical Bureau of the Slovak Republic
Notes to financial statements for Dec 31, 2016,  Dec 31, 2017, and  Dec 31, 2018 Eurostat
Budget forecast for 2019 and Multiannual city budget for 2020-2021 World Bank
Budget amendments in 2019 National Bank of Slovakia
2018 City controller report on control results Skalica city web-page
City controller report on budget forecast for 2019 and Multiannual city budget for 2020-2021  
Investment Plan for 2019  
Semi-annual monitoring report of budget implementation in the City of Skalica  

Appendix 5. Important indicators relevant to rating assessment

Indicator 2018 2019F Data source
GDP per capita in PPP (current international dollars) 35,136 36,640 IMF
GDP growth in constant prices (%) 4.1 2.6 IMF
Inflation, annual average rate (%) 2.5 2.6 IMF
Fiscal balance (% of GDP) - 0.7 - 0.8 IMF
External debt (% of GDP) 113 112 ECB (2019 Q2)
Indicator of economic development High income High income World Bank

Rating history

The rating was last released for distribution on May 31, 2019. The previous unsolicited rating assessment was released at BBB, outlook Stable. 

Regulatory disclosure

The unsolicited credit rating and outlook were issued in accordance with ACRA Europe’s methodology for sub-sovereign entities in the version from May 31, 2019 (available at https://acra-europe.com, Methodology section). In the same section is a rating scale including an explanation of the importance of each rating category and a default definition. Information on the rate of historical failure is available at www.cerep.esma.europa.eu, and the explanatory statement of the meaning of those default rates is available at https://acra-europe.com (Regulatory Framework/Disclosure). The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. Since July 30, 2012, ACRA Europe has been a registered credit rating agency according to Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies.

The sub-sovereign rating and its outlook are expected to be revised within 6 months following the publication date of this press release as per the Calendar of planned sub-sovereign rating revisions and publications.

This rating is issued as an unsolicited rating. The rated entity did not participate in the credit rating assignment. ACRA Europe did not have access to the rated entity’s internal documents or management. ACRA Europe, in the context of routine care, verified all sources entering the rating process and considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The rated entity was notified on November 27, 2019, and after the notification there were no changes or amendments in the rating.

ACRA Europe provided no additional services to the City of Skalica. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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Minutes from the Rating Committee