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���������ֳ� - Warsaw - 14 Feb 2025: ���������ֳ� has affirmed the Estonian City of Tallinn's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A+' with Stable Outlooks and withdrawn the ratings. A full list of rating actions is below.

The affirmation reflects ���������ֳ�'s expectation that Tallinn's financial performance will remain in line with its ratings over the medium term. This is despite a weakened macroeconomic environment, and pressure on the city's budget resulting from high inflation, the effects of war in Ukraine.

���������ֳ� has chosen to withdraw Tallinn's ratings for commercial reasons.

KEY RATING DRIVERS

Risk Profile: 'Midrange'

The risk profile combines three factors assessed at 'Midrange' (revenue robustness, expenditure adjustability and liabilities and liquidity flexibility), two at 'Stronger' (expenditure sustainability and liabilities and liquidity robustness) and one at 'Weaker' (revenue adjustability).

Revenue Robustness: 'Midrange'

The city's revenues are generally stable and moderately reliant on the economic cycle as they are dominated by personal income tax (PIT; average 69% of operating revenue in 2020-2024). PIT revenue grew by 9% in 2024 as high inflation led to wage-rise pressure, while a weaker labour market and higher unemployment did not affect Tallinn as strongly as other Estonian local governments.

We expect that the national economy will return to growth from 2025 and pick up in 2026 (by 1.2%-2.3% annually). Combined with stabilising unemployment, this could lead to higher PIT revenue. State transfers are Tallinn's second-largest revenue source. We expect they will account for 17% of operating revenue over the rating horizon.

Revenue Adjustability: 'Weaker'

Tallinn has limited scope for additional taxation as PIT rates are set nationally. The PIT allocation rate for 2024 was 11.89% and with an additional new rate of 2.5% from pension income implemented by the government. Local taxes, mainly land tax, contribute less than 5% to the city's operating revenue and are inflexible. However, a recent land revaluation will increase the city's revenue by at least EUR2.4 million annually from 2025. Current transfers, which cover operating expenses, are also less flexible.

Estonian local governments can access an equalisation fund, but Tallinn is ineligible due to its high revenue. The 'Weaker' assessment of revenue adjustability is based on our assumption that Tallinn could raise additional revenue in case of an expected decline of revenue, but that coverage would be significantly below 50% of the losses,

Expenditure Sustainability: 'Stronger'

Tallinn aims to maintain higher growth of operating revenue than operating expenses. The city's operating balance increased to EUR106 million from EUR84 million in 2023, with a budget deficit of EUR61 million driven by investments. Responsibilities such as education, transport, roads, social care, and utilities are non-cyclical. Capex is tied to EU grant availability, and the city can delay investments if funding is not secured.

Major planned investments in 2025 include transport infrastructure and education. The possible merger of state and city-owned hospitals and potentially building a completely new hospital are in early-stage discussions with the Prime Minister and the city, without a concrete financing plan, so no capex is planned for 2025 to 2029.

Expenditure Adjustability: 'Midrange'

Tallinn operates under a legal framework with balanced budget rules, under which local governments' budgets are approved by the central government and are not allowed to run deficits. The city has a moderate share of inflexible costs, as about 70%-90% are committed expenditure. Staff costs accounted for 37% of opex (average in 2020-2024) and the city is still under pressure for wage increases as the National Bank estimates 4.4% average salary growth in 2025.

In 2025-2029, we project low capex (13% of total expenditure) due to the uncertainty surrounding the new hospital construction. Capex is more flexible than current expenditure and can be increased upon accessibility of non-returnable EU capital grants.

Liabilities & Liquidity Robustness: 'Stronger'

Tallinn operates under a strong national debt management framework and has a strong individual credit policy. Debt is raised only to secure investment finance and there are no other forms of liabilities. At end-2024 the city's share of loans from the European Investment Bank (EIB) was 77%, from Nordic Investment Bank (NIB) 17%, and other loans made up 6%.

The EIB loans have amortising debt structures and final maturities up to 2044, ensuring a smooth and not too burdensome debt service for the city. All the debt is euro-denominated and most has floating rates, which exposes the city to the risk of increasing interest rates. The city has limited off-balance-sheet risks, consisting mainly of debt of municipal companies, such as the transportation government-related entity and the two hospitals. The municipal companies' debt was EUR42 million at end-2024.

Liabilities & Liquidity Flexibility: 'Midrange'

Tallinn has a strong cash position and does not rely on external borrowing. The city's liquidity policy foresees a minimum cash position of EUR50 million at any time that would enable it to service an average amount of liabilities falling due within two weeks. Tallinn has no committed liquidity credit lines. Our revised rating case forecasts a weakening of the synthetic debt service coverage ratio (SDSCR). We expect it will average 2.9x in the rating horizon, much lower than the 8.8x average in 2020-2024.

Financial Profile: 'aaa category'

We expect that Tallinn's debt payback ratio (net adjusted debt to operating balance) will deteriorate due to weakened operating performance, but remain strong and below five years, which corresponds to a 'aaa' assessment. The SDSCR (operating balance to synthetic debt amortisation, including short-term maturities) will decrease to 2.9x, down from the average 3.6x forecast in our previous scenario, but still corresponding to a 'aa' score. The fiscal debt burden (net adjusted debt to operating revenue) will increase to 38% by 2029, from 24% in 2024 (on preliminary basis), which also corresponds to a 'aaa' assessment. These metrics justify a 'aaa' financial profile.

We assume that in the medium term the city can prove its resilience to sharp shocks, despite its vulnerability resulting from its small size compared with other European capital cities. We assume that Tallinn can maintain a sound financial profile with its financial profile score remaining in the 'aaa' category. This will be supported by the reduced investment portfolio, which will lower the need for debt, and supportive changes to the land tax legislation. The largest threat to the city's budget stems from PIT tax reform.

Tax reform discussed by the Estonian parliament foresees a new allocation of PIT to mitigate financial inequalities among local governments, increasing their share of PIT on pensions to 2.5% from 1.88%, while reducing their portion from PIT on salaries to 11.89% from 12.06%. However, the reform also considers compensating local governments with dividends that were previously allocated to the state. We have not incorporated these changes into our rating scenario.

Derivation Summary

We assess Tallinn's Standalone Credit Profile at 'aa-', reflecting the combination of a 'Midrange' risk profile and financial profile assessed in the 'aaa' category under our rating case. The IDRs are not affected by any asymmetric risk or extraordinary support from the central government of Estonia. The city's ratings are capped by Estonia's ratings. The Estonian framework does not allow for rating a local government above the sovereign.

Short-Term Ratings

Tallinn's Short-Term IDR is 'F1+', the higher option for a 'A+' Long Term IDR.

Key Assumptions

Risk Profile: 'Midrange'

Revenue Robustness: 'Midrange'

Revenue Adjustability: 'Weaker'

Expenditure Sustainability: 'Stronger'

Expenditure Adjustability: 'Midrange'

Liabilities and Liquidity Robustness: 'Stronger'

Liabilities and Liquidity Flexibility: 'Midrange'

Financial Profile: 'aaa'

Asymmetric Risk: 'N/A'

Support (Budget Loans): 'N/A'

Support (Ad Hoc): 'N/A'

Rating Cap (LT IDR): 'A+'

Rating Cap (LT LC IDR) 'A+'

Rating Floor: 'N/A'

Quantitative assumptions - Issuer Specific

���������ֳ�'s rating case is a "through-the-cycle" scenario, which incorporates a combination of revenue, cost and financial risk stresses. It is based on 2020-2024 figures and 2025-2029 projected ratios. The key assumptions for the scenario include:

- Operating revenue growth of 2.5% annually, including tax revenue growth of 3.1% due to inflationary increase in wages (National Bank of Estonia: 4.4% in 2025)

- Opex growth of 2.3% annually due to the expectation that the pressure will ease from 2025

- Net capex of EUR137 million annually, down because of the uncertainty surrounding the new hospital construction

- Apparent cost of new debt 4.4% per year, new debt long-term (up to 20 years maturity) and smoothly amortising; the cost includes a risk premium for unexpected interest rate increases as the city's debt stock is based on floating interest rates

Liquidity and Debt Structure

Tallinn's direct debt was EUR296 million at end-2024, up from EUR245 million the year before, due to the EUR70 million drawdown of the EIB loan and NIB loan. Adjusted debt includes concession obligations paid by the city (end-2024: EUR42 million). Those are old liabilities, which the city has partially renegotiated. As a result, interest payments were reclassified by the city from interest costs to other opex in 2023 and the final payments were re-adjusted to reflect the current higher interest rates.

Issuer Profile

Tallinn is the capital of Estonia, with 461,250 inhabitants at end-January 2024 (end. The city is service-oriented and its wealthy economy results in high tax revenue. The unemployment rate follows the national rate, which deteriorated in 2024 due to the prolonged recession. Tallinn will be European Capital of Sport in 2025.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Not applicable as the ratings have been withdrawn

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Not applicable as the ratings have been withdrawn.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ���������ֳ�'s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ���������ֳ�'s ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.

Discussion Note

Committee date: 11 February

There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion.

Public Ratings with Credit Linkage to other ratings

Tallinn's IDR was capped by the sovereign IDR.

References for Substantially Material Source Cited as Key Driver Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on

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