TEXT-S&P cuts ratings on five Spanish regions
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 are lowering our ratings on five Spanish normal-status regions by one to two notches. -- We are affirming our 'BBB-' long-term rating on the Balearic Islands. -- The negative outlooks on these six regions reflect, among other factors, our negative outlook on the long-term rating on Spain and our view of the risk of regional noncompliance with fiscal targets. Rating Action On Oct. 17, 2012, Standard & Poor's Ratings Services lowered its long-term issuer credit ratings on the following Spanish normal-status regions: -- The Autonomous Community of Andalusia to 'BBB-' from 'BBB', -- The Autonomous Community of Aragon to 'BBB-' from 'BBB', -- The Autonomous Community of Canary Islands to 'BBB-' from 'BBB+', -- The Autonomous Community of Galicia to 'BBB-' from 'BBB+', and -- The Autonomous Community of Madrid to 'BBB-' from 'BBB+'. We also lowered to 'A-3' from 'A-2' our short-term issuer credit ratings on the autonomous communities of Galicia and Madrid. We affirmed our 'BBB-' long-term issuer credit rating on the Autonomous Community of the Balearic Islands. The outlooks on all six regions are negative. Rationale The rating actions follow our downgrade of the Kingdom of Spain (see "Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative," published Oct. 10, 2012, on RatingsDirect on the Global Credit Portal). The characteristics of Spanish normal-status regions mean that they cannot be rated above the sovereign under our criteria. The ratings on the six normal-status regions primarily reflect our view that the central government is ready and able to support the regions' debt service and fund their fiscal deficits over the rating horizon. This will be done through a legally established credit facility--"Fondo de Liquidez Autonomico" (FLA)--designed for this specific purpose. The FLA's structure and purpose are roughly in line with our previous expectations stated in May 2012 (see "FAQ: What's Behind Our Downgrades Of Various Spanish Regional Governments," published May 4, 2012). The facility has been operational since September 2012 and, in our opinion, has started to service regional financial obligations in a smooth and coordinated manner. FLA has initially been endowed with EUR18 billion which, in our view, should suffice until year-end 2012. We expect the FLA to be endowed with about EUR32 billion for 2013. In our view, the central government is strongly committed to ensuring smooth coverage of the regions' debt service. Thus, the ratings on the six regions are based on the assumption that the central government will: -- Maintain the FLA at least during our forecast horizon (2012-2014) if necessary; -- Endow the FLA with sufficient funds to cover both refinancing of existing nondomestic debt and deficit targets; and -- Operate the FLA in a flexible manner and with a high degree of coordination with Spain's normal-status regions. Given current market conditions, we assume that the six regions will request adherence to the FLA between 2012 and 2013. We understand that major Spanish banks have agreed with the central government to roll over their positions with the Spanish regions in 2012-2013. So far, Spanish banks have rolled over their exposure to the six rated regions and we expect them to maintain this policy. However, the FLA also envisages the possibility of covering the maturities of domestic loans if, contrary to our current expectation, Spanish banks do not roll them over. We expect some of the risk positions of the smaller, lower credit quality banks may be covered this way. Our decision to align the regions' ratings at the same level as the sovereign rating is based on our base-case expectation that Spanish normal-status regions will make progress with fiscal consolidation and roughly comply with the central government fiscal targets during our forecast horizon (2012-2014). Our expectation is based on the assumption that the central government has already significantly increased monitoring over the regions, and will exert direct control, including taking over management of potentially delinquent regions, as contemplated by the Spanish budgetary stability law. We will review the indicative credit levels (ICL) of the six regions as we receive relevant and updated information on their budgetary execution and on their liquidity. 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. Outlook The negative outlooks on Spain's normal-status regions reflect the negative outlook on the sovereign. If we lowered the long-term rating on Spain, we would lower the ratings on the six regions as we currently assess that Spanish normal-status regions cannot be rated above the sovereign under our criteria. In addition, in the event of a sovereign downgrade, we may decide to revise downward our assessment on the institutional framework for Spain's normal-status regions, with potential downgrades of several regions by up to three notches. This could occur if we considered that diminishing credit quality of the central government might result in a lower ability and willingness to provide financial support to regions. Negative triggers for future potential downgrades on each or all of the regions also include: -- The possibility that the FLA might not function as expected. This could occur, for instance, if we see that the central government is not injecting funds into the FLA at a pace that ensures a smooth coverage of regional funding needs. A failure of the FLA to provide sufficient, reliable liquidity support to Spanish regions may result in a credit cliff for Spanish regions, with potential downgrades of more than one category, as access to FLA currently supports our liquidity assessment on all Spanish normal-status regions. -- The possibility that, despite enhanced control and supervision from the central government set in the new budgetary stability law and the royal decree-law that introduced the FLA, one or several of the regions may materially deviate from budgetary targets, and that the central government's policy response may be insufficient, in our view, to redress their performance. Depending on the reach or severity of the deviation, we may revise downwards our view on the financial management of the delinquent regions. If incompliance is widespread and affects several regions, we may also review downwards our assessment of the strength of Spain's institutional framework for normal-status regions. All else being equal, we expect this could result in downgrades of up to three notches. We may add negative triggers to individual regions as part of a thorough review of their ICLs. We could revise the outlook on one or more of the six regions to stable if we revised the outlook on the long-term sovereign rating on Spain to stable, and if we also believed that the individual ICL was compatible with a stable outlook. Related Criteria And Research -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative, Oct. 10, 2012 -- FAQ: What's Behind Our Downgrades Of Various Spanish Regional Governments, May 4, 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 Andalusia (Autonomous Community of) Aragon (Autonomous Community of) Issuer Credit Rating BBB-/Negative/-- BBB/Negative/-- Senior Unsecured BBB- BBB Canary Islands (Autonomous Community of) Issuer Credit Rating BBB-/Negative/-- BBB+/Negative/-- Senior Unsecured BBB- BBB+ Galicia (Autonomous Community of) Issuer Credit Rating BBB-/Negative/A-3 BBB+/Negative/A-2 Senior Unsecured BBB- BBB+ Madrid (Autonomous Community of) Issuer Credit Rating BBB-/Negative/A-3 BBB+/Negative/A-2 Senior Unsecured BBB- BBB+ Commercial Paper A-3 A-2 Affirmed The Balearic Islands (Autonomous Community of) Issuer Credit Rating BBB-/Negative/-- Senior Unsecured BBB- 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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