Moody's investors Service has today downgraded the City of Zagreb's issuer rating to Ba1 from Baa3; the rating outlook remains negative.
Today's rating action follows Moody's recent decision to downgrade the sovereign bond rating of Croatia to Ba1 stable from Baa3 negative (For full details please refer to the Sovereign press release: http://www.moodys.com/research/Moodys-downgrades-Croatias-government-bond-r ating-to-Ba1-from-Baa3--PR_265054).
RATINGS RATIONALE 
Moody's action on the City of Zagreb reflects the close financial and operational linkages between the state and local governments in Croatia. Zagreb is highly dependent on intergovernmental revenues in a form of shared taxes and central government transfers, representing around 70% of operating revenues in the past few years. In addition Zagreb's wealthy status among Croatian cities exposes the city to adverse decisions from central government either aimed at redistributing resources to other cities or to contribute achieving fiscal consolidation. The country's weak growth prospects is expected to impair the city's revenue base and its tax proceeds in particular. The limited flexibility over the revenue and expenditure is likely to translate into increased budgetary tensions and tight liquidity positions in 2013.
The negative outlook on the city reflects the pressures stemming from its 100% owned company Zagrebacki Holding D.O.O..
Zagreb's rating is underpinned by (i) its solid gross operating balance, averaging 18.5% of operating revenue in the last four years; (ii) balanced financial performance; and (iii) very low direct debt burden accounted for only 8.4% of operating revenue in 2011. At the same time the rating is constrained by (i) the city's significant indirect debt exposure almost entirely represented by either city-guaranteed or unsecured debt of Zagrebacki Holding; (ii) weak liquidity position, at 1% of operating revenue (average monthly balance in 2012); and (iii) the exposure of Zagreb's revenue base to Croatia's financial and economic situation.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Any positive change of the sovereign rating could determine upward pressure on the City of Zagreb, only if associated with a significant improvement in the city's liquidity position combined with sustained decrease in net direct and indirect debt.
Any deterioration of Croatia's rating will determine a downward change of Zagreb's rating. Further downward pressure could be also exerted by an overall growth in the debt exposure.
As the capital of Croatia, Zagreb is the country's political, economic and cultural centre, and major transportation hub. The city accounts for 18% of the country's population and has the strongest regional economy in the country with GDP per capita almost double of the national average. It contributes almost one-third of national GDP and around half of Croatia's export. The city's diversified economy and its surrounding areas also attract a large portion of the country's foreign direct investment. 
Source: bne