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

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

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

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

Sources: 2020-2022 Multiannual budget forecast for the city of Skalica, ACRA Europe’s calculations

Appendix 4. List of Material Data Sources

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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