Home Ratings and Research Currently valid ACRA Europe affirms unsolicited rating of BBB- to SKALICA, outlook Negative
ACRA Europe affirms unsolicited rating of BBB- to SKALICA, outlook Negative
Friday, 29 May 2020

ACRA Europe affirms the unsolicited credit rating assigned to the city of Skalica (hereinafter, the City) primarily based on the assessment of financial factors. In the aforementioned assessment, the results of the operating budget analysis show a very low level of surpluses, which are important 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.

The two-month slowdown in the Slovakian economy will lead to recession, and also impact municipal budgets. According to the latest economic forecasts, a shortfall in the share of tax revenues of approximately 7% is expected due to the ongoing coronavirus crisis. The Agency assumes that the city of Skalica will try to offset the shortfall of income by reducing some operating and capital expenditures, or by postponing them to later periods. The shortfall in the share of tax revenues will negatively affect the volume of the City's operating budget surplus, especially as in the long-term, the surpluses are expected to fall short of the volumes needed for debt service. Despite the fact that the City's operating budget surplus increased significantly in 2019, the Agency does not expect any further increase in 2020, mainly due to coronavirus crisis. A deterioration of regional indicators can also be expected.

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

High

Operating Balance

Low

Regional Economy

Moderate

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 risk of a very low level of operating budget surpluses and low levels of short-term liquidity.

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

Key assumptions

• The shortfall in the share of taxes will not reach a significantly higher amount than the one forecast by the Council for Budget Responsibility in April 2020;

• Indebtedness will remain at a level comparable to 2019;

• Short-term liquidity will not reach a significantly lower levels compared to 2019;

• An operating budget surplus in 2020.

Potential outlook and/or rating change factors

A positive rating action may be prompted by:

  • Significantly lower debt levels than forecast for 2020;
  • Significant increase in the operating budget surplus to more than twice the debt service amount in 2020;
  • Significant improvement in short-term liquidity ratio compared to 2019;
  • Significant improvement in macroeconomic indicators in the Slovak Republic for 2020.

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 shortfall in operating budget income than forecast for 2020;
  • Significantly higher debt levels than forecast for 2020;
  • Significant deterioration of liquidity indicators compared to 2019;
  • Significantly lower level of operating budget surplus than forecast for 2020, or operating budget deficit in 2020.

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 2017–2019 in thous. EUR

Budget item

Execution

Dec 31, 2017

%

Execution

Dec 31, 2018

%

Execution

Dec 31, 2019

%

Operating income total

13,834

98%

15,307

101%

17,020

103%

Tax income

7,730

99%

8,648

101%

9,580

101%

Non-tax income

2,345

98%

2,556

103%

2,904

 %

Grants and subsidies

3,759

98%

4,103

99%

4,536

108%

Operating expenditure total

13,137

98%

14,198

98%

15,420

99%

Interest expenses

189

96%

171

96%

132

95%

Operating account surplus/deficit

697

x

1,109

x

1,600

x

Capital income total

1,582

74%

2,191

83%

584

66%

Income of property sold

272

70%

1,061

86%

87

534%

Capital grants and subsidies

1,310

75%

1,130

80%

497

58%

Capital expenditure total

3,842

91%

3,185

92%

1,808

81%

Capital account surplus/deficit

-2,260

x

-994

x

-1,224

x

Financial operations, income

3,063

84%

2,073

85%

2,373

68%

Loans from banks

2,446

84%

1,934

85%

2,051

85%

Financial operations, expenditures

1,426

63%

1,774

80%

2,093

71%

Principal payments

1,426

63%

1,774

80%

1,771

83%

Financial account surplus/deficit

1,637

x

299

x

280

x

TOTAL INCOME

18,480

93%

19,571

97%

19,977

96%

TOTAL EXPENDITURE

18,405

93%

19,157

95 %

19,321

93%

TOTAL BUDGET SURPLUS/DEFICIT 

50

x

414

x

656

x

Sources: 2017-2019 Budget execution reports for the city of Skalica, ACRA Europe’s calculations

Appendix 2. Balance Sheet for 2017–2019 in thous. EUR

Balance item

Dec 31, 2017

Dec 31, 2018

Dec 31, 2019

Assets

     

Fixed Assets:

65,361

66,604

67,417

Intangible assets

64

60

59

Tangible assets

48,187

49,434

50,248

Long-term financial assets

17,110

17,110

17,110

Short-term assets:

7,441

7,524

7,640

Stock

1

1

1

Settlements

6,807

6,590

6,392

Long-term receivables 

3

3

3

Short-term receivables

296

219

176

Cash and equivalents

334

711

1,069

Repayable financial assistance

0

0

0

Accruals

8

2

7

TOTAL ASSETS

72,810

74,130

75,065

Liabilities

     

Equity/Funds

41,503

42,629

43,342

Liabilities

14,092

14,638

14,584

Long-term liabilities

9,882

11,026

10,499

Short-term liabilities

982

1,007

796

Reserves

12

2

149

Bank loans and financial assistance

3,192

2,557

3,015

Settlements

24

47

125

Accruals

17,215

16,864

17,140

TOTAL LIABILITIES

72,810

74,130

75,065

Sources: 2017-2019 Financial statements for the city of Skalica, ACRA Europe’s calculations

Appendix 3. Multiannual City Budget for 2020–2022 in thous. EUR

Budget item

Budget for 2020

(after changes)

Budget for 2021

Budget for 2022

Operating income total

17,179

17,923

18,482

Tax income

9,904

10,643

11,195

Non-tax income

2,891

2,928

2,935

Grants and subsidies

4,384

4,352

4,352

Operating expenditure total

15,982

16,046

16,184

Interest expenses

144

155

155

Operating account surplus/deficit

1,197

1,877

2,298

Capital income total

1,355

500

300

Income of property sold

900

500

300

Capital grants and subsidies

455

0

0

Capital expenditure total

1,067

910

1,057

Capital account surplus/deficit

288

- 410

-757

Financial operations, income

900

1,000

1,000

Loans from banks

900

1,000

1,000

Financial operations, expenditures

1,899

2,131

2,094

Principal payments

1,857

2,131

2,094

Financial account surplus/deficit

-999

-1,131

-1,094

TOTAL INCOME

19,434

19,423

19,782

TOTAL EXPENDITURE

18,948

19,087

19,335

TOTAL BUDGET SURPLUS/DEFICIT

486

336

447

Sources: 2020-2022 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 2017, 2018, and 2019

Ministry of Finance of the Slovak Republic

Balance sheet for Dec 31, 2017, Dec 31, 2018, and Dec 31, 2019

Statistical Bureau of the Slovak Republic

Notes to financial statements for Dec 31, 2017, Dec 31, 2018, and Dec 31, 2019

Eurostat

Budget forecast for 2020 and Multiannual city budget for 2021–2022

World Bank

Budget amendments in 2020

National Bank of Slovakia

2019 City controller report on control results

Skalica city web-page

City controller report on budget forecast for 2020 and Multiannual city budget for 2021-2022

Council for Budget Responsibility of Slovakia

Investment Plan for 2020

Labor, Social Affairs and Family Office of Slovakia

National Inspection Bureau Report from inspection performed from June 1, 2019 to October 25, 2019

 

Rating history

The rating was last released for distribution on May 31, 2019. It was revised and the outlook was downgraded on November 29, 2019. After the revision, the unsolicited rating assessment was released at BBB-, outlook Negative.

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 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 May 27, 2020, 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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