The rating assigned to the city of Stropkov remains unchanged and is mainly based on a positive assessment of low indebtedness, high short-term liquidity, and sufficient operating balance surpluses in previous years. ACRA Europe has downgraded the rating outlook from Stable to Negative given the increased likelihood of the following critical factors:

-       The risk of higher indebtedness of the city in 2020;

-       The risk of an operating balance deficit in the city’s budget at the end of 2020.

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 Stropkov 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 City’s operating budget, which is expected to be in deficit in 2020. In 2017–2019, the City’s operating budget was in surplus, the volume of which exceeded the debt service by more than three times on average. This allowed the city to create a fair volume of reserves, which may be used in the crisis year of 2020. Nevertheless, the City expects to use short-term overdraft resources to bridge the gap between operating budget revenues and expenditures. A deterioration of regional indicators is also expected.

Rating components

Outlook: Negative

The negative outlook has been assigned based on the expectation of the risk of higher indebtedness of the City in 2020 and the risk of an operating balance deficit in the City’s budget at the end of 2020.

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

Key assumptions

• Indebtedness will not increase significantly compared to the 2020 forecast;
• The short-term liquidity ratio will not reach levels lower than those forecast for 2020;
• The operating budget will reach a surplus compared to the forecast for 2020.

Potential outlook and/or rating change factors

A positive rating action may be prompted by:

• Significantly lower debt levels than forecast for 2020;
• Significantly higher operating budget surplus compared to 2019;
• Significantly higher use of capital grants than forecast for 2020;
• 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;
• Significant deficit in operating balance or significantly lower level of operating budget surplus compared to 2019.

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

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 Stropkov, ACRA Europe’s calculations

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

Sources: 2017–2019 Financial statements for the city of Stropkov, 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 Stropkov, ACRA Europe's calculations

Appendix 4. List of Material Data Sources

Appendix 5. Important indicators relevant to the rating assessment

Rating history

The rating was last released for distribution on June 7, 2019. It was revised and affirmed on December 6, 2019. After the revision, the unsolicited rating assessment was released at A-, 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 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 ratings and their 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 June 3, 2020, and after the notification there were no changes or amendments in the rating.

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

Download pdf

Minutes from the Rating Committee meeting