Fitch Affirms Autonomous Community of Castile-La Mancha at 'BBB-'; Outlook Stable

Fri Jan 24, 2014 11:38am EST

BARCELONA/PARIS/LONDON, January 24 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Castile-La Mancha's (CLM) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlooks for the Long-term IDRs are Stable. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. KEY RATING DRIVERS CLM’s ratings are supported by the rating floor that Fitch introduced for all Spanish regions in March 2012 and which is presently a notch lower than the IDR of Spain (BBB/Stable). The floor for Spanish regions is based on a number of supporting factors, which improve liquidity and reduce the likelihood of default by a region. These include the recent budgetary stability law, the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution, the existence of the regional liquidity fund FLA (Fondo de Liquidez Autonomico), and the fact that negative tax settlements can now be paid over a 10-year period, easing liquidity for Spanish regions. CLM’s standalone credit metrics are weaker than its ratings would indicate due to structural negative current balances since 2008 and a high debt burden. Without the floor the ratings of the region would likely fall into the ‘BB’ category. Following an official revision of GDP figures, CLM recorded a 2012 deficit at 1.57% of its GDP in 2012, which is slightly above the 1.5% objective set by the central government. It was therefore required to submit a new financial plan in 2013 to the Ministry of Finance, which was subsequently approved. Fitch expects the region to have met the 1.3% deficit target for 2013 although this would depend on regional economic growth and accounting adjustments undertaken by the central government. Fitch currently expects CLM’s operating revenue to grow marginally through to 2015, and operating expenditure to have further declined in 2013 as a result of cost cutting. The agency considers that in the event of an unexpected decline in current revenue, CLM would further cut operating expenditure although not without adversely impacting the quality of public services. The regional government’s approved 2014 budget indicates a negative operating balance of EUR155m, based on conservative funding allocation from the central government. Fitch expects that the operating balance should turn positive by 2015 on expected economic rebound. This should result in a more pronounced recovery of tax revenue, but it will also depend on the central government’s tax revenue allocations. Fitch estimates CLM’s debt to have reached EUR11bn at end-2013, including EUR2.9bn financing granted by the central government in 2012 to repay commercial obligations and a further EUR1bn in 2013, plus EUR1.6bn from FLA. This means that about half of CLM’s debt was formalised under funding programmes established by the central government (Supplier Fund and FLA), underlining the importance of government support to the region’s finances. The 2014 budget implies an increase in debt of EUR800m this year. Fitch still expects that the region’s direct debt could increase to EUR12bn by end-2015 or 190% of current revenue compared with only 56% in 2009. However, it would be 26% of regional GDP, below the target of 30.9% set by the central government in July 2013. RATING SENSITIVITIES Fitch will review the rating floor if the supporting factors of the rating floor are removed or diminished or if there is doubt as to the ability and the willingness by the central government to continue to provide extraordinary support to Spanish regions. Improvements of fiscal performance leading to a positive structural current balance, coupled with a more balanced debt repayment calendar, may result in a positive rating action. KEY ASSUMPTIONS The ratings are based on a number of assumptions: - Fitch assumes that the liquidity mechanism introduced by the central government will continue beyond 2014, if borrowing remains difficult - Fitch also assumes that there are no significant accountings adjustments by the central government to the budgetary out-turn of the region that would make the final outcome significantly worse than Fitch’s expectations. Contacts: Primary Analyst Guilhem Costes Senior Director +34 93 323 8410 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85 Barcelona 08008 Secondary Analyst Fernando Mayorga Managing Director +34 93 323 84 07 Committee Chairperson Christophe Parisot Managing Director +33144299134 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside the United States", 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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