Trencin Region -- Moody's assigns Aa2.sk rating to Trencin Region

RATINGS RATIONALE

The Aa2.sk national scale issuer rating assigned to Trencin Region primarily reflects its responsive fiscal policy, which should prevent any sharp deterioration in the region's financial metrics, and also reflects its favourable amortising debt structure with long-term maturities. Although the region's indebtedness has been relatively stable over the last four years and is not likely to exceed 50% of operating revenue in the next two years, it remains comparatively high. The rating also takes into account the rigidity of the region's budget caused by its high reliance on central government transfers and limited flexibility in operating expenditure. As a result, strained operating margins provide very limited capacity to fund infrastructure requirements.

In 2007-2011, Trencin Region maintained an operating surplus thanks to continuous control over its operating expenditure, although, compared to its peers, operating results have been rather weak and are barely sufficient to cover debt service. Despite substantial recovery in shared-tax revenue recorded in 2011, the gross operating balance improved only slightly to 2.1% of operating revenue from a record low of 0.7% in 2010. "We expect the region will maintain modest single-digit operating margin in 2012. However, current budgetary pressures are unlikely to ease significantly in the next two years unless (1) the region's administration make a stronger commitment to apply structural and sustainable austerity measures or (2) adjustments are made in funding of the key regional responsibilities at the central government level," says Ivan Kuvik, lead analyst for Trencin Region in Moody's Sub-Sovereign Group.

Trencin Region's weak operating performance resulted in its minimum capacity to fund infrastructure requirements, which translated into sustained financial deficits over the past five years and a sharp increase in debt in 2008. The region's 2012-2013 investment plan relies heavily on investment grants and is expected to be associated with only moderate financial deficits. Financing of the region's share of these infrastructure projects should be ensured by current cash reserves and an existing revolving loan. However, Moody's notes that higher-than-expected co-financing needs of the EU-sponsored projects might force the region's administration to revise its current aversion to new debt issuance. "In light of the region's weak operating performance, we would regard any further increase in debt as a significant credit negative, although current debt displays a favourable structure which consists of amortising bank loans with long-term maturity profiles, thereby enabling a smooth debt service," adds Mr. Kuvik.

The negative outlook assigned to Trencin Region's rating mirrors the negative outlook on Slovakia's sovereign rating, as well as the region's continuous budgetary strains driven by its weak capacity to fund investment requirements.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade Trencin Region's rating is regarded as unlikely given the negative rating outlook. A change to a stable outlook or an upgrade of the region's rating would require a return to a stable outlook or an upgrade of Slovakia's sovereign ratings, or sustained improvement in the region's operating and financial performance. A downgrade of Slovakia's sovereign rating would likely lead to a downgrade of the region's rating. Further deterioration in operating performance, deepening of financial deficits and rapid growth in debt exposure in the medium term could also exert downward pressure on the rating.

Trencin Region is the second-smallest region in Slovakia located in the western part of the country. Trencin is relatively affluent region by Slovak standards ranking third (out of eight regions in total) in terms of its real GDP per capita, which is officially slightly above 88% of the national average. Trencin Region's economy remains focused on industrial production which accounts for more than 32% of the region's employment compared to the national average of 22%. Other sectors with a significant foothold in Trencin Region are the wholesale, retail and construction industries.

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, The Application of Joint Default Analysis to Regional and Local Governments, published in December 2008, and Mapping Moody's National Scale Ratings to Global Scale Ratings published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".sk" for Slovakia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

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Ivan Kuvik Associate Analyst Sub-Sovereigns Group Moody's Investors Service Limited Czech Branch Washingtonova 17 110 00 Praha 1 (Prague 1) Prague, Czech Republic Telephone: +420-22-422-2929David Rubinoff MD - Sub-Sovereigns Sub-Sovereigns Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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