Think Railways

Fitch Ratings has affirmed Miejskie Przedsiebiorstwo Komunikacyjne - Lodz Spolka z o.o.'s (MPK) revenue bond programme at 'BBB-'.

The affirmation is based on Fitch's expectation that the revenue bond programme's liquidity will remain sufficient until maturity. It also factors in the ring-fencing of the revenue bonds from MPK's other operations.

The revenue bond rating reflects liquidity provided by the City of Lodz to support MPK, which is strategically important to the city due to its provision of the tram and bus service, including Lodzki Tramwaj Regionalny (LTR) tram service.

Lodz's annual payments as remuneration to MPK for its LTR tram service are essential for the liquidity of the revenue bond programme. Fitch is of the view that the city is committed to ensuring the company's financial viability and would provide additional financial support, if necessary.

The City of Lodz's annual payments to MPK's venture account (VA), comprising mainly the remuneration for the LTR tram service, significantly exceed MPK's annual obligations to bondholders. Between June 2013 and May 2014 those payments to the VA were PLN24.3m while obligations to the revenue bonds were PLN11m.

The VA ring-fences revenue generated by the venture assets paid to the account from MPK's other operating risks. MPK can only access the VA for purposes other than relating to the bond programme if the amount within the account exceeds 12 months of bond service.

The revenue bondholders are legally better protected than MPK's other creditors. They have first claim on revenues in the VA and also a pledge on the venture assets excluding them from the bankruptcy estate. The City of Lodz is obliged to contract LTR transport services to and inject equity into MPK, providing MPK with resources to service the revenue bonds over the long term.

MPK plans to cover 51.8 million kilometres of transport services in 2014, lower than in 2012. This is because new large infrastructural investments in the City of Lodz in 2013-2015 have led to a temporary reorganisation of the public transport network. Revenue may stabilise in 2014-2015 at about PLN590m (2013: PLN573m), PLN24m of which will come from the LTR service.

The company's debt remains considerable (2013: PLN276.6m) and may rise in the medium term due to planned rolling stock replacement. The revenue bonds remain the biggest debt item, accounting for 44% of the company's total debt in 2013.