TEXT-S&P cuts Province of Barcelona to 'BBB-'

Tue Oct 16, 2012 12:02pm EDT

Related Topics

Oct 16 - Overview
     -- We lowered our sovereign ratings on Spain to 'BBB-/A-3' from 
'BBB+/A-2' and assigned a negative outlook to the long-term rating on Oct. 10, 
2012.
     -- We cap the rating on the province of Barcelona (Barcelona) at the 
level of the long-term sovereign rating because, under our criteria, the 
province does not meet the conditions to be rated higher than the sovereign.
     -- Therefore, we are lowering our long-term rating on Barcelona to 'BBB-' 
from 'BBB+'.
     -- The negative outlook on the Province of Barcelona reflects the outlook 
on Spain, given the close financial links between the province and the central 
government.

Rating Action

On Oct. 16, 2012, Standard & Poor's Ratings Services lowered to 'BBB-' from 
'BBB+' its long-term issuer credit rating on the Spanish Province of Barcelona 
(Barcelona). The outlook is negative.


Rationale

The downgrade reflects a similar action on Spain (BBB-/Negative/A-3) on Oct. 
10, 2012 (see "Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And 
Political Risks; Outlook Negative," published on RatingsDirect on our Global 
Credit Portal).

We cap the rating on Barcelona at the level of the long-term rating on Spain. 
This reflects our view that the Province does not meet the criteria under 
which we would rate a local or regional government (LRG) higher than its 
sovereign (see "Methodology: Rating A Regional Or Local Government Higher Than 
Its Sovereign," published Sept. 9, 2009).

Under these criteria, an LRG can be rated one notch higher than its sovereign 
if it can maintain credit characteristics that are more resilient than the 
sovereign's in a stress scenario, has a predictable institutional framework 
that limits the central government's interference, and displays high financial 
flexibility. 

At this stage, we believe that Barcelona does not display these 
characteristics. The province depends on the central government for 85% of its 
operating revenue, limiting its financial independence and ability to 
withstand a sovereign stress scenario. Moreover, local governments in Spain 
have, in our view, a limited ability to oppose any unwanted changes to their 
institutional framework. Consequently, we apply a sovereign cap to the rating 
on Barcelona. 

At the same time, we have lowered Barcelona's indicative credit level (ICL) to 
'aa-' from 'aa'. According to our criteria, the ICL is not a credit rating but 
a means we use to assess the intrinsic creditworthiness of an LRG under the 
assumption that its rating is not constrained by the sovereign. The ICL 
results from the combination of our assessment of an LRG's individual credit 
profile and the institutional framework where it operates.

We have lowered our assessment of Barcelona's ICL to reflect that the 
province's external risks have increased, evidenced by our recent downgrade of 
Spain and our downgrade of Catalonia (BB/Negative/B) in August 2012. Most of 
the province's revenues come from formula-based central government transfers. 
We therefore believe that ongoing fiscal consolidation at the central 
government level represents a risk to the province's credit profile, notably 
to its currently strong financial performance. Also, the lowering of the ICL 
factors in the risk that Barcelona may be called upon to partly offset 
Catalonia's dwindling and/or delayed transfers to municipalities (as occurred 
in 2011 2012). At this stage, however, we do not factor in additional payments 
under our base-case scenario beyond the EUR175 million that the province has 
already paid to the municipalities on account of the region, or possible 
central government negative adjustments to the province's institutional 
framework.

Barcelona has a strong ICL thanks to its low debt burden (with tax-supported 
debt at 30% of operating revenues by the end of 2014 according to our 
forecast), "very positive" liquidity position under our criteria, strong 
expenditure flexibility, and continued solid financial performance. 

The province's ICL is also supported by what we see as management's strong 
commitment to maintain financial sustainability, as evidenced by Barcelona's 
track record of healthy financial performances. The province has posted 
operating margins above 20% of operating revenue and slight budgetary 
surpluses on average since 2005. Under our base-case scenario, we anticipate 
the province will post an operating balance above 20% of operating revenues 
annually and positive balances after capital expenditures (capex) until 2014, 
which should enable it to stabilize tax-supported debt at about 30% of 
operating revenues. 

Barcelona's ICL could come under pressure if the province materially deviates 
from its budget, runs sizable deficits that we deem structural, and 
accumulates debt, with no sign of a return to balanced budgets or debt 
stabilization. 

The ICL could also weaken if our assessment of the province's institutional 
framework were to weaken, or if the province decides to offset ailing regional 
transfers to municipalities, thereby further depleting its cash holdings.

Liquidity 
According to our criteria, we assess Barcelona's short-term liquidity position 
as "very positive." Our liquidity assessment takes into consideration our view 
that the province's internally generated cash will cover more than 1x its next 
12-month debt service. 

Barcelona's cash holdings have historically been high. In the past three 
years, monthly average cash holdings have not dipped below EUR216 million. 
However, Barcelona's cash decreased considerably in the first half of 2012. 
This is because Barcelona agreed to fund Catalonia's transfers to the 
province's municipalities, amounting to EUR175 million. Catalonia committed to 
reimburse Barcelona before the end of 2012. We are not certain whether 
Catalonia will be able to meet these payments on time, given the region's 
tight liquidity position. Therefore, we have adjusted our estimate of 
Barcelona's internally generated cash, resulting in a debt service coverage 
ratio of more than 1x, compared with 5.3x previously.

To pay these advances to its municipalities, Barcelona signed four credit 
lines in April 2012 for the first time, amounting to a total of EUR90 million, 
which were completely cancelled by the end of June. We understand that 
Barcelona does not expect to sign other short-term facilities during the 
remainder of the year.

Barcelona's buoyant liquidity position contrasts with the widespread liquidity 
strains currently faced by other Spanish sub-sovereign tiers (regions and 
cities). In our view, Barcelona's cash abundance stems from the nature of its 
responsibilities (in particular, it is not subject to substantial demand 
pressure from the population); sound budgeting processes; and prudent 
expenditure management (tending to carry out investments only after the 
related funding has been cashed in).


Outlook

The negative outlook on Barcelona reflects that on Spain.

We do not currently envisage a likely scenario that would lead Barcelona's 
'aa-' ICL to weaken by seven notches, which would in turn trigger a downgrade. 
We therefore currently consider that a further downgrade of Barcelona would 
only follow a negative rating action on the sovereign. 

We could revise the outlook on Barcelona to stable if we revised our outlook 
on Spain to stable and, all else being equal, if we considered that the 
province's financials remained unchanged. 

Because the rating is subject to a sovereign rating cap and the sovereign 
rating has a negative outlook, we see no potential for an upgrade of Barcelona 
at this point. 


Related Criteria And Research

     -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political 
Risks; Outlook Negative, Oct. 10, 2012
     -- Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010
     -- Methodology: Rating A Regional Or Local Government Higher Than Its 
Sovereign, Sept. 9, 2009 


Ratings List
Downgraded
                            To                From
Barcelona (Province of)
 Issuer Credit Rating       BBB-/Negative/--  BBB+/Negative/--

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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