Statement on rating

The Slovak Rating Agency granted following ratings to City Košice:

Long-term local currency rating	C (positive outlook)
Long-term foreign currency rating	C - (positive outlook)
Short-term rating	NS

Rationale:

• Košice, the second largest city in Slovakia, is located on the boundary-line between the eastern side of Slovenske Rudohorie and Kosicka kotlina. From the political and administrative point of view City Košice is divided into following sections: Košice I, Košice II, Košice III and Košice IV. The city with appropriate geographic position near to the borders with Ukraine (90 km), Poland (80 km), Hungary (20 km) and the connection with above mentioned countries by road, airway and railway networks connecting Eastern and Western Europe, has a perspective for acquisition of sufficient volume of foreign investments, as well as creation of new job opportunities. Even though City Košice has already a relatively strong developed economy basis and legal entities create more than 9% of GDP of the Slovak Republic within the City, the unemployment rate reaching up to 16,83 % as of December 31, 2001 is a serious problem.
• The City takes steps leading to stabilisation of public finances. The need of financial consolidation resulted mainly from negative trading incomes of the City; e.g. the volume of foreign sources exceeded effective revenues realised in the current year during the monitoring period, debt service of the City achieved during the monitoring period the values as follows: as of ultimo 1998 the value of 33%, as of ultimo 1999 of 46,5%, as of ultimo 2000 of 21% and as of ultimo 2001 it represented 23% of actual realised revenues of the City. In addition, the City had an adverse time structure of receivables and liabilities as of ultimo of 2001, 93% of receivables have been out of maturity date and only 4% of liabilities represented the liabilities within the maturity. A major part of revenues of the City has been reached by single incomes from the sale of assets of the City.
• We evaluate positively the started restructuring process of liabilities of the City; the main goal is restructuring of existing liabilities, achievement of better interest terms, rationalization of own business management of the City, but mainly increase of debt service. Consolidation of municipal finance should be successfully completed with realising of both projects.
• In ours view, positive trend can be seen in the management system. The City accepted the measures for improvement of financial management and financial situation, which has been shown in the reduction of total indebtedness of the City from SKK 2,2 bn (as of ultimo 2000) to the amount of SKK 1,7 bn (as of January 31, 2002). However, it is necessary to continue the realisation of changes in management system more rapidly. It seems to be needed to organise the strategic management for the area of financial management, as well as for the area of the City administration including contributory and business companies of the City.
• Within the process of restructuring, we suggest the City to proceed in solving of situation concerning the contributory organisations and business companies with equity participation of the City. The most of these organisations show lossy management; don't admit economic effect to the City, which debit the municipal budget. Undone and slow procedure in solving the lossy management of these organisations and companies may have a negative impact on the rating of the City.
• In connection with the transition of the competences from government administration authorities to the municipalities and initial negotiations have taken place with the representatives of City Košice at the level of district and regional offices. The City has formed a commission dealing the transition of competences and delimitation of assets. However, the City has no calculation of hidden debt concerning the examined assets, because it is not clear up to now, which competences and assets will be transferred to the City and which one to particular municipal sections. The risk is to be seen in non-creation of financial reserves for covering the unexpected expenditures in connection with delimitated assets.
• The uncertainty of external environment is created by the Act on City Košice. Based on the Act municipal sections represent independent legal entities with individual budget without responsibility for budget contributions for the municipal authorities of Košice concerning financing of expenditures used for keeping the public wealth. Based on the existing system of original competences the municipal sections are divided into so called rich and poor sections depending on their revenues. The system of original competences of municipal sections caused in City Košice creation of 23 individual and independent municipal treasuries without uniform distribution of public duties, and thereby also the reduction of financial flow and municipal finances. Unification of financial management and development of one municipal budget could bring savings in administration area - the current system has established 23 municipal authorities and their number might be reduced after the unification of municipal treasuries.

Slovak rating agency, Ltd.
Bratislava, 26 March 2002