Credit Rating

20.09.2010

Summary: Sofia (City of)

Sofia (City of)

24.08.2010

Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Research Update:
Bulgarian Capital Sofia Upgraded To Investment Grade 'BBB-' On Consistently Strong Operating Performance; Outlook Stable

Overview

• The Bulgarian capital City of Sofia has demonstrated consistently strong operating budgetary performance over last two years.
• Its performance has proven resilient to economic difficulties.
• The city has managed to arrange EU and state-government cofinancing for its massive infrastructure program.
• We are raising the city's long-term rating to investment grade 'BBB-'.
• The stable outlook reflects our expectation that slow but steady economic recovery, combined with the city's ability to establish tight control over operating spending and to benefit from large state and EU cofunding, will help it gradually improve its deficit after capital expenditures in line with our medium-term projections.

On Aug 24, 2010, Standard & Poor's Ratings Services raised its long-termissuer credit rating on the Bulgarian capital City of Sofia to investmentgrade 'BBB-' from 'BB+'. The outlook is stable.

Rationale

The upgrade reflects the resilience of Sofia's solid operating budgetary performance to ongoing economic difficulties and our expectation that significant confirmed funds from the EU will help the city complete its major infrastructure projects with slower debt accumulation.

The rating reflects Sofia's strategic position as the administrative, financial, and commercial center of the Republic of Bulgaria (BBB/Stable/A-3); consistently high operating surplus; modest debt burden; strong liquidity position; and strong support from the central government.

Due to its status as the country's capital, the city benefits from population growth, contrary to the country's trend; higher-than-average income levels; diversification of its economy, with a strong focus on services and location of national companies' headquarters; and inflow of about 70% of the country's foreign direct investment.

The relative strength of the city's economy, which accounts for about 30% of Bulgaria's GDP, has helped the city sustain a strong operating budgetary performance amidst the recent economic difficulties. The economic downturn in 2009 caused the city's own operating balance as a percentage of own operating revenues to reduce, but it nevertheless remained a strong 19%. We expect the city's operating surplus to stay at similar levels in 2010-2012, despite only sluggish economic growth projected for this period.

Outlook

The stable outlook reflects our expectation that slow but steady economic recovery, combined with the city's ability to establish tight control over operating spending and to benefit from large state and EU cofunding, will help the city gradually improve its deficit after capital expenditures in line with our medium-term projections.

Ratings List

Upgraded

City of Sofia
Issuer credit rating BBB-/Stable/-- BB+/Positive/--