TEXT-Fitch affirms Italy's Region of Lombardy at 'A-'
Oct 30 - Fitch Ratings has affirmed the Region of Lombardy's Long-term foreign and local currency ratings at 'A-' and Short-term foreign currency rating at 'F2'. The Outlooks for the Long-term ratings are Negative, mirroring those on Italy's sovereign rating. The rating action affects financial debt outstanding of about EUR2.3bn, including USD1bn of bonds (ISIN US541624AA07), and future direct borrowing. The ratings reflect Fitch's continued expectations of an underlying operating balance of about EUR0.5bn, or 2.5% of the budget size, amid a stock of financial debt hovering around EUR2.3bn as the balanced budget rule to be effective in 2014 will likely lead to a substantial freezing of net borrowing. Lombardy's ratings remain constrained by Italy's as under Fitch's criteria a subnational cannot be rated above the national government lacking substantive financial autonomy. Therefore, should Italy's Outlook be revised to Stable, Lombardy's Outlooks would change accordingly if the region continues to perform in line with projections. Conversely a drop of operating margin into negative territory or growth of the unreserved fund balance deficit could trigger a negative rating action. The 2.5% operating margin is rather low by international standards yet it covers debt servicing requirements by 2x. Although the 2011 budget outperformed expectations as the operating balance stood close to EUR1.3bn rather than the Fitch projected EUR0.5bn, the agency believes it will be eroded in 2012-2013 following cuts in regional revenues instrumental to the national efforts to achieve a cyclically adjusted balanced budget by 2013. Yet with the 2011 surge of the operating balance the region is well positioned to withstand a curtailment in national subsidies thus continuing to maintain the roughly balanced budget which it achieved since 2010. Economic contraction of about 2% in 2012 and likely stagnation in 2013 will keep Lombardy's tax revenues rigid and hovering around EUR20bn, in line with 2011. Though declining, the operating surplus hinges upon the strict control of spending which in 2011 contracted by about 1%. Fitch continues to believe that Lombardy's capital spending will eventually decline towards EUR1bn, or 5% of the budget size, from about 8% over the 2006-2010 period as the rigidity of the operating budget makes the size of investment more contingent upon borrowing. Although the latter is being constrained by the balanced budget rule, Fitch believes that law offers some flexibility to allow debt-funded capital spending. Lombardy's ongoing unreserved fund balance deficit of about EUR1.8bn, or 9% of its budget size, is a drag on the region's finances as Fitch believes that overcoming such a deficit may prove to be a long process, especially given Lombardy's budget rigidity, which will eventually involve a mix of spending cuts and tax enhancing measures, as well as borrowing. Lombardy's liquidity remains satisfactory, despite the fund deficit due to spending not yet committed against revenue already accrued and commitments for investment not yet transformed into legal/effective obligations. By considering the cash held at the national treasury, Lombardy's liquidity continues to hover around EUR1.5bn, five times higher than annual debt servicing requirements of about EUR300m. Additional information is available at www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, and "International Local and Regional Governments Rating Criteria outside United States", dated 17 August 2012, are available on www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria International Local and Regional Governments Rating Criteria - Outside the United States
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