Fitch Ratings-London/Warsaw-17 July 2009: Fitch Ratings has today changed the Polish City of Wroclaw's Outlooks to Negative from Stable. The ratings are affirmed at Long-term foreign and local currency 'A-' respectively. Fitch has assigned Wroclaw a National Long-term rating at 'AA-(pol)' with Stable Outlook.

The change in the City of Wroclaw's Outlook to Negative reflects deteriorating operating performance, pressure on capital expenditure that may lead to further financing requirements, and expected increase in indirect debt due to investments by municipal companies. However, the ratings also factor in above national economic wealth indicators and financial flexibility to increase local taxes and cut operating spending, which in turn should help protect debt coverage ratios.

The ratings may be downgraded if the city is unable to restore its operating performance to significantly above 10% of operating revenue and/or to strengthen its debt coverage ratios .

In 2008 Wroclaw's operating balance declined to 8.1% of operating revenue from 14.2% in 2007, reflecting pressure on operating expenditure. Operating spending increased 13.6% y-o-y while operating revenue rose only 6.2%, mainly due to a 13% increase in personnel costs and 17.4% increase in goods and services costs. In 2009 the city may face further pressure on personnel costs following the central government's decision to increase teachers' salaries (by 5% in January and September 2009) but which is not fully funded by the central government.

The reduction of personal income tax (PIT) rates by the state government with effect from 1 January 2009 and the economic crisis are likely to result in flat, if not a decline in, income tax revenue. Wroclaw has some flexibility to raise local tax rates for 2010, which could provide an additional PLN35m-PLN40m.

Wroclaw's financing requirements are high. Annual capex may amount to about PLN1.5bn in 2009-2012, which will be financed with debt and EU funds. Several investments relate to the European football championship that Wroclaw will be hosting in 2012. Fitch therefore expects direct and indirect debt to increase considerably in 2009-2012. However, if the city is able to restore its sound operating performance to 2006-2007 levels and generate revenue from asset sales, as projected, this could help reduce its debt requirements. Debt levels doubled in 2008 to account for 41.5% of current revenue, although the debt burden remained moderate with a payback ratio below six years and debt servicing absorbing 62% of the operating balance.

Wroclaw is the capital of the Dolnoslaskie Region and has about 632,000 inhabitants (18% of the region's population). Wroclaw is the most developed and wealthiest area in the region, with a GDP per capita 40% above the national average, and is a major regional cultural and educational centre.

Contacts: Elzbieta Kaminska, Warsaw, Tel: + 48 22 338 62 84, Renata Dobrzynska-Wac, +48 22 338 62 82.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

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Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(pol)' for National ratings in Poland. Specific letter grades are not therefore internationally comparable.