Fitch Affirms Italian Autonomous Province of Trento at 'A'; Outlook Negative

Fri Jan 17, 2014 11:36am EST

MOSCOW/MILAN/LONDON, January 17 (Fitch) Fitch Ratings has affirmed the Italian Autonomous Province of Trento's (PAT) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' and its Short-term Issuer foreign currency IDR at 'F1'. The Outlook is Negative. Fitch has also affirmed the Autonomous Province of Trento's credit-linked notes, which are listed as follows: -University of Trento's EUR43.7m amortising fixed-rate notes due in 2015 (ISIN: IT0003976971): Long-term local currency rating affirmed at 'A-' -Trentino Trasporti's EUR33.6m amortising fixed-rate notes due in 2014 (ISIN: IT0003794127): Long-term local currency rating affirmed at 'A-' -Garda Trentino Fiere's (GDF) EUR15m bullet fixed-rate notes (now Patrimonio del Trentino's (PDT) notes following the incorporation of GDF into PDT in December 2011) due in 2016 (ISIN: IT0004051436): Long-term local currency rating affirmed at 'A-' -Itea's EUR49.9m amortising fixed-rate notes due in 2015 (ISIN: IT0003794572): Long-term local currency rating affirmed at 'A-'. KEY RATING DRIVERS The ratings reflect PAT's strong financial flexibility, which allows the province to cope with external pressures such as its contribution to reducing the national deficit and debt, while maintaining its own healthy finances. The protection granted by its special autonomous status shields PAT from the risk of unilateral interference by the state, and hence contributions to national consolidation efforts are subject to bilateral agreements. Provincial management benefits from a focused and a forward-looking approach. A broad overhaul of provincial back-office functions over the medium term is expected by Fitch to save EUR200m, or 5% of the province's budget. Fitch expects overall operating spending over the medium term - excluding possible new functions devolved from the state - to remain close to the average of the 2010-2012 period at EUR2.8bn. Fitch assumes in its baseline scenario that the net costs of new possible functions, ranging from tax policing, justice to parks, will compress the operating margin towards EUR1bn or closer to 20% of adjusted operating revenue over the 2014-2016 period, down from the 30% average of 2010-2012. PAT has significant budgetary flexibility, resulting from its high discretionary capex (only EUR400m are recurring) and tax-raising potential of about EUR200m. Fitch forecasts on average EUR1.5bn per year of capital spending for 2014-2016, largely funded by the current balance. Even in a stressed scenario in which the operating margin falls to 15%, due to stagnant revenues and/or a higher-than-expected contribution to the reduction of the national deficit, Fitch sees PAT's overall budget remaining balanced, given its strong budgetary flexibility. The province has passed tax relief and business-friendly measures to promote private capex with a view to spurring economic growth. Fitch expects PAT's GDP to have contracted by 0.5% in 2013 and to rebound to 1% in 2014-2015. Exports and tourist inflows remain a source of expansion given subdued domestic consumption. The province enjoys a strong socio-economic profile with a GDP per capita 20% above the EU average and an unemployment rate of 6% (Italy: 12%). Although PAT is debt-free, its financial-arm, Cassa del Trentino, had EUR1,063m net debt at end-2013 (net of provisions for a bullet bond repayment). This figure should increase to EUR1.5bn over the medium term as it continues to finance municipalities and other provincial public-sector entities. Additional indirect liabilities relate to EUR223m of guarantees, EUR45m in provincial entity bonds directly serviced by PAT, and about EUR300m debt of core subsidiaries. Fitch expects overall PAT's liabilities to remain below 3x the current balance in 2014-2016, which is stronger than its 'A' peers in light of the province's commitment to maintain overall public sector debt at below 10% of local GDP. The notes were issued against annual contributions granted by Trento to the entities pursuant to provincial law. The entities have mandated the province, through a delegation of debt according to Italian Civil Code rules, to retain the contributions and irrevocably use them to service the notes when due. With the acceptance of the debt delegation, the province has undertaken a direct obligation towards the noteholders to pay principal and interest (within the limit of the contributions granted). A failure to do so would involve the right of the noteholders to claim the amounts owed to them directly against the province without the need to request payments first to the entities. However, since the debt delegation does not involve a discharge of the entities from their obligations under the notes, they would still be bound to make payments under the notes should the province fail to make any payments. In addition, the province has undertaken an 'impegno di spesa pluriennale' (multi-annual fixed expense undertaking), implying an irrevocable commitment of the province on a multi-annual basis. The province does not explicitly recognise the contributions granted to the entities, and therefore the instalments payable to noteholders, as ranking equally with Trento's own direct debt obligations. In Fitch's view, this implies a subordination of the notes compared with the province's senior unsecured debt. RATING SENSITIVITES A negative rating action on Italy (BBB+/Negative) could affect PAT's rating. Despite the resilience of PAT's budget, Fitch downgraded its rating following Italy's downgrades in March 2013. As the sovereign rating falls towards speculative grade, Fitch has narrowed the notching difference between the sovereign and the province to two from three, to reflect the risk of intensification of economic stress, which may in turn weaken the predictability of inter-governmental relations. A stabilisation of economic conditions and a revision of Italy's Outlook to Stable may lead to PAT's Outlooks being revised to Stable. As the ratings of the notes are credit-linked to the PAT, any movement in the ratings of the latter will be reflected on those of the bonds. Contacts: Primary Analyst Sergio Ciaramella Director +39 02 87 90 87 216 Fitch Italia S.p.A. 1, Vicolo S. Maria alla Porta 20123 Milan Secondary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Committee Chairperson Vladimir Redkin Director +7 495 956 7064 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 August 2012, 'International Local and Regional Government Rating Criteria', dated April 2013, and 'Rating Subnationals Above the Sovereign - Outside US' dated 2 May 2012 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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