TEXT-S&P affirms Italian Region of Lazio at 'BBB+'
Overview -- We forecast that the Italian Region of Lazio will structurally improve its budgetary performance, mainly thanks to a steady reduction of the health care sector's annual deficit. -- We are affirming our 'BBB+' long-term rating on Lazio. -- The negative outlook on Lazio mirrors that on Italy. Rating Action On Dec. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' long-term issuer credit rating on the Italian Region of Lazio. The outlook remains negative. Rationale The rating on Lazio primarily reflects its wealthy economy and our estimate that it will likely improve its budgetary performance, mainly owing to its tight rein on health care expenditures . The rating also reflects our view of the region's improving cash flow generating capacity, thanks to more efficient planning. We also assume that the central government will disburse a certain amount of arrears in response to the satisfactory implementation of Lazio's health care restructuring plan. On the negative side, we believe the rating is constrained by sizable operating payables, which Lazio, however, started to trim in 2011. The region's fairly high debt burden is also a constraining factor, although we see it stabilizing going forward. The rating also reflects our view that ongoing pressures on regional public finances will continue, may become structural, and could weaken Lazio's budgetary flexibility. In particular, we believe the region will continue to face sluggish real GDP growth and, possibly over the long term, further fiscal consolidation measures imposed by the central government. If confronted with further revenue cuts, we believe the region would maintain its fiscal discipline through streamlining expenditure and by further exploiting its tax bases, increasing tax rates, and exhausting its current revenue flexibility. As a consequence of the economic recession, we anticipate that central government health care transfers will stagnate in 2012-2014, compared with a 2% growth in health care revenues in 2009-2011. Still, Lazio has generated additional proceeds from tax hikes and tax recoveries to weather upcoming central government fiscal consolidation measures in 2012-2013. However, we anticipate a 0.5% decline in operating revenues in 2012-2014. Our base-case scenario forecasts that Lazio will reduce its operating expenditure by a compounded annual rate of 1.2% in 2012-2014. Our assumption mainly hinges on Lazio's successful implementation of its health care restructuring plan, and, to a lesser extent, a rationalization of transfers for local transport. We believe Lazio continues to make substantial progress toward restructuring its health care sector, which is the region's main responsibility. Lazio's health care deficit fell to EUR775 million in 2011 (7.5% of its health care revenues) from EUR1.1 billion in 2010 (10.5%). This performance exceeds Lazio's targets and our previous expectations under our upside scenario. In our view, Lazio's successful health care performance resulted from the central government's managerial support and an improvement in Lazio's planning and monitoring capabilities. In addition, we believe that the cost cutting measures imposed by the state are more effective thanks to synergies created by Lazio's own cost streamlining processes. This includes a strict turnover freeze, control of health care provisions, and the use of a central station to purchase goods and services. Under our base-case scenario, we anticipate continuing reduction of Lazio's health care deficit, thanks to cost rationalization efforts and new mandatory cost containing measures imposed by the central government in its recent spending review. These will more than neutralize the impact of dwindling state transfers to Lazio's health care fund. We expect the region's health care deficit to decline to EUR610 million in 2012 (6% of health care revenues) and to EUR450 million by 2013 (4.5%), on the back of a steady 2% annual cost reduction. Overall, we anticipate an increase in operating surpluses to 4% in 2014, under our base-case scenario, from operating deficits in 2008-2011. This trend is compatible with our previous forecasts. Lazio's growing operating margins and shrinking investments will help improve its overall budgetary performance. More stringent budgetary targets included in the national stability pact force Lazio to steadily trim its capital expenditures (capex). As a result, our base-case expectations include close-to-balanced results after capex on an accrual basis in 2013-2014, lower borrowings that should not exceed EUR300 million annually, and stabilizing tax-supported debt at about EUR12 billion by 2014 (87% of operating revenues). Lazio's demonstrated capacity to apply fiscal adjustments, enhanced monitoring tools on its most strategic shareholdings, and prudent approach toward debt and derivative management, underpin our assessment of its financial management as "satisfactory," as our criteria define this term. This translates into a score of '3' (on a scale of 1 to 5, where 1 is the highest and 5 is the weakest). In addition, Lazio is adapting its accounting system in line with a national public finance accounting reform (to be finalized in 2014). As the new accounting system aims to gradually reduce discrepancies between budgeted, accruals, and cash figures, it will ultimately increase the transparency of Lazio's fund balance and its budgeting processes. Liquidity In accordance with our criteria, we revised our assessment of Lazio's liquidity position to "neutral" from "negative," reflecting its improving cash flow generating capacity. Access to external funding is "satisfactory" as our criteria define this term. Lazio's improved liquidity position mainly stems from: -- The cash in of part of the "Fondo Aree Sottoutilizzate" (FAS)--a special central government fund for undeveloped areas--and significant pending central government transfers in 2011, to which Lazio is entitled owing to its compliance with health care consolidation targets; -- More regular cash inflows thanks to the proceeds from regional surcharges; and -- More predictable cash outflows, as the region signed agreements with 90% of its health care suppliers to pay invoices at scheduled dates. Lazio's stronger liquidity allowed it to increase payment rates in 2012 and, consequently, make less use of its EUR1,954 billion available liquidity facility with a pool of banks (Unicredit, Banca Monte dei Paschi di Siena SpA, and Banca Nazionale del Lavoro SpA). We estimate that Lazio has drawn a monthly average of EUR0.350 billion in the last 12 months, significantly below the EUR1.3 billion drawn in 2009-2010. We understand that the region's credit line expires at year-end 2012, and the identity of the new providers has yet to be decided. However, we expect that the total contracted amount will be roughly similar to the existing one. Under our base-case scenario, we anticipate that our liquidity ratio (average cash and credit line available adjusted for estimated monthly results after capex, over the next 12 months' debt service) will be above 2x, which also reflects the stabilization of Lazio's debt service burden until 2014. Our base-case assumptions are that Lazio will maintain similar liquidity ratios in 2013-2014, thereby benefiting from structurally balanced budgets in cash terms, while gradually reducing its still-sizable level of operating payables. We expect operating payables to decline to 40% of operating expenditures by 2014, from 46% in 2011, on the assumption that central government revenue transfers linked to health care--the bulk of regional revenues--will not be reduced or delayed, and that a portion of state arrears will be disbursed each year owing to Lazio's success in reducing its health care deficit should also help lower operating payables. Outlook The negative outlook on Lazio mirrors that on Italy (BBB+/Negative/A-2). The outlook reflects the possibility that we could lower the rating on Lazio, all other things being equal, should we further lower our ratings on Italy. We could also lower our rating on Lazio to 'BBB' if: -- We see no structural improvement in Lazio's 2013-2014 budgetary performance, for instance if health care deficits return to pre-2011 levels; and -- Central government transfers are significantly delayed, leading to operating and after capex deficits in cash terms, and a weakening of the region's liquidity position. Related Criteria And Research -- 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 Ratings Affirmed Lazio (Region 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.
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