Fitch Affirms Italy's City of Busto Arsizio at 'BBB+'; Outlook Negative

Thu Oct 24, 2013 11:35am EDT

MILAN/BARCELONA/LONDON, October 24 (Fitch) Fitch Ratings has affirmed the Italian City of Busto Arsizio's (BA) Long-term foreign and local currency ratings at 'BBB+' and Short-term foreign currency rating at 'F2'. The rating action affects EUR38m of debt outstanding, as well as future borrowings. The Outlook is Negative. KEY RATING DRIVERS BA's rating affirmation reflects its solid yet weakening budgetary performance, tight control over spending and moderate and declining debt burden. The ratings also factor in the city's moderate tax leeway and strong cash flow generation sustaining its liquidity. BA's operating margin in 2012 was strong at 14%, or EUR10m, due to spending restraint and the rationalisation on municipal subsidiaries. Fitch expects the operating margin to decline over the medium term to 11% and level off at EUR8m as continued reduction in government transfers should only be partially offset by tax hikes and rationalisation of expenditure. However, debt service coverage should comfortably remain at 1.2x over 2013-2015. Municipalities' revenue structure is being reshaped. Property tax on primary residences (IMU) was replaced by national transfers in 2013, and by a new service tax which will be levied by cities from 2014. Fitch does not expect the replacement of the property tax with the service tax in 2014 to cause a decline in Busto's operating surplus. BA's moderate fiscal leeway (7% of its revenue), mostly in the personal income tax surcharge and free fund balance totalling EUR13m in 2012, represents a further buffer against unpredictable budgetary deficits. Fitch expects that a relaxation of the stability pact rules for municipalities will lead to an increase in investments to about EUR13m in 2014-2015, from EUR11m on average in 2011-2012 despite diminishing asset disposals and the city's sound infrastructure. New projects should be spread over a large number of small projects, mainly related to maintenance of streets and municipal buildings. Fitch expects BA's debt to further decline and stabilise at about EUR35m by 2015 from a moderate level of EUR38m in 2012 (EUR70m in 2007). Coverage of debt servicing by the current balance should remain sound at five years. The city issued cash flow swap in 2007 to avoid debt repayment concentration. Improved collection rates above 95% for taxes and fees have resulted in high cash reserves, which totalled EUR35m at end-2012. Fitch, however, expects the relaxation of internal stability pact rules to reduce cash and cash deposits to EUR25m in 2014-2015. BA is a mid-size city in the prosperous Region of Lombardy with a resident population of about 82,000. City's GDP per capita was 10% above the EU27 average while unemployment was low at 9% relative to the nationwide 12% in 2012. RATING SENSITIVITIES BA's ratings are exposed to a downgrade of the sovereign (BBB+/Negative). A debt service coverage ratio falling below 1x, as well as a substantial deterioration in macroeconomic conditions impacting BA's budgetary performance could lead to a negative rating action. Conversely, a rating upgrade would be contingent on an upgrade of the sovereign. Contact: Primary Analyst Marco Bonsanto Analyst +39 02 87 90 87 260 Fitch Italia - Societa Italiana per il Rating S.p.A. Vicolo Santa Maria alla Porta, 1 20123 Milan Secondary Analyst Sergio Ciaramella Director +39 02 87 90 87 216 Committee Chairperson Guilhem Costes Senior Director +34 93 323 84 10 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria 'Tax-Supported Rating Criteria' dated 14 August 2012 and 'International Local and Regional Governments Rating Criteria ' dated 9 April 2013, are available at www.fitchratings.com Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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