Fitch Revises Yerevan City`s Outlook to Positive on Sovereign Rating  Action

ArmInfo.Fitch Ratings has revised the Outlook on the City of Yerevan's Long-Term Foreign- and Local-Currency Issuer  Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at 'B+'.  According to the source, the revision of Outlook follows  the recent similar action on Armenia's sovereign ratings (see 'Fitch Revises Armenia's Outlook to Positive; Affirms at 'B+' dated 10  February 2023 on www.fitchratings.com).  It is also noted  that the city's ratings as capped by the sovereign's.

Let us also note that  the next scheduled review date for Fitch's  rating on Yerevan City is 09 June 2023, but Fitch believes that  developments for the issuer warrant such a deviation from the  calendar.

According to the source, Under applicable credit rating agency (CRA)  regulations, the publication of local and regional government reviews  is subject to restrictions and must take place according to a  published schedule, except where it is necessary for CRAs to deviate  from this schedule in order to comply with the CRAs' obligation to  issue credit ratings based on all available and relevant information  and disclose credit ratings in a timely manner. "Fitch interprets  these provisions as allowing us to publish a rating review in  situations where there is a material change in the creditworthiness  of the issuer that we believe makes it inappropriate for us to wait  until the next scheduled review date to update the rating or  Outlook/Watch status," they said

According to the report, the key rating drivers are linked to the  caps on Armenia's sovereign rating.

"Yerevan's IDRs are capped by those of Armenia as our assessment of  the city's Standalone Credit Profile (SCP) is unchanged at 'bb-'  since the last review on 16 December 2022 (see 'Fitch Affirms  Armenian City of Yerevan at 'B+'; Outlook Stable' on  www.fitchratings.com)." Factors with a low weight is the risk profile  with a rating of .  "Yerevan's 'Vulnerable' risk profile  is driven by five 'Weaker' key risk factors (revenue robustness and  adjustability, expenditure adjustability, liabilities and liquidity  robustness and flexibility) and one 'Midrange' factor (expenditure  sustainability) in a country rated in the 'B' category or below.  The  assessment reflects Fitch's view that there is a very high risk of  the issuer's ability to cover debt service with the operating balance  weakening unexpectedly over the scenario horizon (2022-2026) due to  lower revenue, higher expenditure, or an unexpected rise in  liabilities or debt-service requirements."

Debt Sustainability: 'aaa category': In its rating case, Fitch  assumes that Yerevan will continue to draw down its European  Investment Bank loan to the limit of EUR7 million.  However, the  city's debt levels will remain moderate, with little impact on debt-  sustainability metrics in 2022-2026. Fitch expects the city's debt  payback ratio - the primary metric of debt-sustainability assessment  for Type B local and regional governments (LRG) - will remain strong  at under 5x, which corresponds to a 'aaa' assessment. The latter is  also supported by prudent secondary metrics.

DERIVATION SUMMARY: Fitch classifies Yerevan as a type B LRG, which  has to cover debt service from cash flow on an annual basis.   Yerevan's 'bb-' SCP reflects a 'Vulnerable' risk profile and debt  sustainability metrics assessed at 'aaa' under Fitch's rating case.  The 'bb-' SCP also reflects peer comparison. The IDRs are not  affected by any asymmetric risk or extraordinary support from the  central government, but they are capped by Armenia's sovereign IDRs  at 'B+'.

On February 10, Fitch Ratings improved the outlook on Armenia's  Long-term Issuer Default Rating (IDR) in foreign currency from  "Stable" to "Positive", confirming the IDR at "B+". This is noted in  the Fitch report, which also provides an improved estimate of  Armenia's GDP growth for 2022 to 11.6%, with a further slowdown in  2023 to 6.1% and in 2024 to 4.7%.