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