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���������ֳ� - Warsaw - 26 Mar 2025: ���������ֳ� has assigned the Estonian City of Tallinn Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A+' with Stable Outlooks. A full list of rating actions is below.

Tallinn's ratings reflect ���������ֳ�'s view that the city's operating performance and debt ratios will remain in line with 'A' category peers over the medium term. This is despite a weakened macroeconomic environment and pressure on the city's budget resulting from high inflation and the effects of war in Ukraine.

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KEY RATING DRIVERS

Risk Profile: 'Midrange'

���������ֳ� assesses Tallinn's risk profile as 'Midrange', which reflects the following combination of key risk factors assessments.

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 pressure for wage increases, 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, at 18% of operating revenue at end-2024.

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.

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'

We expect that Tallinn will maintain higher growth of operating revenue than operating expenses. The city's operating balance increased to EUR106 million in 2024 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 investments planned 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 discussions with the Prime Minister and the city, without a concrete financing plan.

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 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. At end-2024, the city's share of loans from the European Investment Bank (EIB) was 99%, and other loans made up 1%.

The EIB loans have amortising debt structures and final maturities up to 2044, ensuring 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.

Financial Profile: 'aaa category'

We expect that Tallinn's debt payback ratio (net adjusted debt to operating balance) will deteriorate due to a weakened operating performance, but remain strong and below five years, which corresponds to a 'aaa' assessment. The synthetic debt service coverage ratio (SDSCR; operating balance to synthetic debt amortisation, including short-term maturities) will decrease to 2.9x, from 4.6x in 2024 (on a preliminary basis), 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 a 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 will prove its resilience to sharp shocks, despite its vulnerability due to 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 land tax legislation.

The Estonian parliament has approved a change in the allocation of PIT to address financial inequalities among local governments. In 2025, 5.50% of pension income and 11.29% of other income will be allocated to local governments, whereas in 2024, these rates were 2.50% for pension income and 11.89% for other income. Additionally, the reform includes compensating local governments with dividends that were previously allocated to the state. We have not incorporated these changes into our rating scenario.

Tallinn's direct debt was EUR296 million at end-2024, up from EUR245 million in 2023, due to the EUR70 million drawdown of the EIB 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 2024 and the final payments were re-adjusted to reflect the current higher interest rates.

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 the ratings of Estonia. The Estonian framework does not allow for rating a local government above the sovereign.

Tallinn's risk profile is 'Midrange', whereas its international counterparts typically have higher risk profiles. Tallinn's financial profile suggests similarities with entities in the 'High Midrange' profile, but the presence of one 'Weaker' key risk factor restricts its risk profile to 'Midrange', similar to the city of Porto in Portugal. Despite their differences in size and function, Tallinn and Porto have similar payback ratios, at just under 5x.

In contrast, French and Spanish cities have stronger risk profiles, affording them greater leeway in their financial profiles. The French cities in particular have forecast payback ratios of between 8x and 9x, with fiscal debt burdens surpassing 90%, much higher than Tallinn's, although its robust financial management enhances its financial profile. The impact of current geopolitical tensions and projected DSCR of about 2x-3x maintain Tallinn's SCP at the lower end of the 'aa' band.

Short-Term Ratings

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

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 our expectation that pressure will ease from 2025.

- Net capex of EUR137 million annually, down because of the new hospital construction being abandoned.

- 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

Issuer Profile

Tallinn is the capital of Estonia, with 461,250 inhabitants at end-January 2024. 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

Negative rating action on Estonia would be reflected in Tallinn's ratings.

A deterioration of the payback ratio to above 7x on a sustained basis in our rating-case scenario could lead to a downgrade.

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

Positive rating action on Estonia's IDRs as Tallinn's IDRs are currently capped by the sovereign ratings.

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: 25 March

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 IDRs are 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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