Fitch Downgrades Region of Calabria to 'BBB'; Outlook Stable

Fri Feb 21, 2014 11:37am EST

Link to Fitch Ratings' Report: Calabria, Region of - Rating Action ReportMILAN/LONDON, February 21 (Fitch) Fitch Ratings has downgraded the Italian Region of Calabria's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB' from 'BBB+' and affirmed the Short-term foreign currency IDR at 'F2'. The Outlooks are Stable. The rating actions affect approximately EUR1.15bn of outstanding debt, as well as future borrowing. KEY RATING DRIVERS The downgrade reflects Calabria's weakening economy and subsequent constraints to the region's revenue raising flexibility amid likely curtailment of national subsidies stemming from the upcoming spending review. The Stable Outlook reflects Fitch's expectations that management will stabilise debt at around EUR1.5bn over the medium term, close to one-third of the budget, and debt-service coverage ratio at close to 1x the operating balance while continuing the payment of commercial liabilities accumulated in the health care sector prior to 2011. The downgrade also reflects the following rating drivers and their relative weights: HIGH Economy: Fitch expects Calabria's GDP to have fallen by about 2% in 2013, marking its sixth consecutive year of output contraction with a cumulative fall in GDP of about 10% and a surge in the unemployment rate to about 21% from 12% since 2008. Roughly 50% of medium-sized companies did not expect an increase in turnover to be forthcoming in 2H13. Consequently, Fitch believes industrial and commercial activities will remain subdued in the medium term. The growing agriculture and tourism sectors will only partly offset salary freezes in the public sector, prolonging stagnation in the job market. The employment base is expected by Fitch to hover at around 525,000 over the medium term, with a sharp 10% contraction over 2012-2014. Calabria has about two million inhabitants and a weak local economy by international standards, as indicated by per capita GDP 35% below the EU average. MEDIUM Fiscal performance and flexibility: Revenue for health care is equalised nationally, which neutralises Calabria's weak fiscal capacity. However, the region has personal income tax (PIT) and business tax (IRAP) rates above the national average in its efforts to maintain a balanced health care sector. Potential cushion to absorb any reduction in health and/or non-health subsidies that the national government is pursuing over 2014-2016 will be confined to revenue flexibility stemming primarily from proceeds from fighting tax evasion, such as the car tax, and spending rationalisation to a lesser extent. Expenditure is also relatively rigid as health care absorbs 80% of the budget and other responsibilities such as public transport appear underfunded. Fitch expects Calabria's operating balance to be about EUR100m over 2013-2015, a modest 2.5% of the operating revenue by international standards. Calabria's IDR also reflect the following key rating drivers Management: Fitch expects 2013-2015 cumulated capex of EUR2bn to be mostly funded by EU/state subsidies, thus limiting deficit before debt to 2.5% of revenue per year in 2013-2015. Calabria will not need to borrow heavily as its low spending capacity and spending limits imposed by the national government have contributed to a fund balance surplus of about EUR5bn. These resources are almost entirely earmarked for capital spending in infrastructure and economic development. Nevertheless, Calabria is among the few Italian regions with a budgetary policy oriented towards maintaining an unreserved fund surplus, albeit relatively small averaging EUR50m or 1% of the budget. Debt and Liquidity: Fitch expects Calabria's financial debt will remain around EUR1.5bn over the medium term, with roughly EUR250m new borrowing to fund new investment while drawn down loans agreed with the national government will partly fund past commercial liabilities. Despite loans and bonds remaining moderate by national and international standards (30% of revenue), the weak operating margin weighs on debt sustainability with the debt to current balance ratio falling towards 30 years, from around 10 years in 2012. Health care liabilities accumulated before 2011 have been partly funded via a 30-year EUR428m loan in 2011 while about EUR700m of state funds were re-allocated from socio-economic development. However, cash draw down is slowed by bills verification and accounting checks and unpaid commercial liabilities are set to decline to roughly EUR1.1bn by March 2014 from about EUR1.9bn in 2012, partly absorbing Calabria's EUR1.1bn cash at the end of December 2013. RATING SENSITIVITIES Calabria's rating could be downgraded if the local economy continues to weaken, further constraining budget flexibility, or if Italy's spending review had an adverse impact, compressing the budgetary performance beyond Fitch's expectations. Failure to further reduce the stock of commercial liabilities for which funding is already available, could also be rating negative as it would not be commensurate with a 'BBB' rating, especially if there were adverse changes in the preferential payment mechanism for financial debt, which is paid in priority over debt to suppliers. Conversely, an improvement of the operating margin towards the 5% leading to a debt-to current balance below 10 years in a context of the economy strengthening as shown by an unemployment rate of about 15% could eventually lead to a positive rating action if Italy's rating is not downgraded. Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch Italia S.p.A. 1, Vicolo S. Maria alla Porta 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. 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