Fitch Affirms Historical Territory of Alava at 'A-'; Outlook Stable

Fri Mar 14, 2014 12:39pm EDT

LONDON/MILAN/BARCELONA, March 14 (Fitch) Fitch Ratings has affirmed the Historical Territory of Alava's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A-' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS The affirmation reflects Alava's solid socio-economic profile, its ability to maintain sound operating performance despite a decline of tax revenues, and favourable debt repayment. The ratings also take into the account its prudent management and solid financial reporting. Alava's high tax autonomy and socio-economic profile allow it to be rated above the Kingdom of Spain (BBB/Stable/F2). Alava enjoys a much wealthier economy than other provinces in Spain with GDP per capita 55% and housing prices 43% above the national average in 2012. Between 2008 and 2012 average housing prices in Alava dropped 11% versus a 23% decline nationally. The labour market has also outperformed the national average, with a 11% fall in total registered workers between 2008 and 2013 during the economic downturn, below Spain's 15% decrease. The unemployment rate in the province in 4Q13 was at 17.5%, a rise from 7.5% in 4Q08, but still much lower than Spain's 26%. The less severe impact of the downturn in Alava can be explained by a smaller contribution of the construction sector, and much lower indebtedness of households. Despite one-off volatility in tax revenue during 2008-2013 caused by a court decision on tax revenue return, Alava's budgetary performance was unaffected due to the unique financial system in the Basque Country, including tax-sharing between provinces and the region. The decline of tax revenue during this period was, to a large extent, matched by lower operating expenditure. Once institutional transfers are deducted, Alava recorded strong operating performance with a current balance equivalent to 33% of its adjusted current revenue in 2012. According to Fitch base case forecasts, tax revenue growth of 2.4% per year from 2014 to 2016, operating expenditure increase of 2% should result in an increase of the current balance to EUR110m in 2016 from EUR60m in 2014. In spite of declining tax revenue, the provincial administration has maintained capital expenditure and support for its municipalities. This contributed to a steep increase in debt to EUR476.2m in 2013, equivalent to 23.3% of its gross current revenue, up from 3% in 2007. Despite the increase in debt and deterioration in its operating performance, Alava has managed to fully cover its debt repayment with its current balance. In the medium term, Fitch does not expect debt to increase substantially. Alava is the largest territory of the Basque Country (BBB+/Stable) accounting for 45% of its geographic area. However, its population of approximately 321,000 is small and more than 75% is concentrated in its capital, Vitoria. In common with Northern Spain, the population aged over 65 accounts for 19% of its population. This equates to a high cost of social services. RATING SENSITIVITIES A downgrade could stem from a larger-than-expected debt level leading to a weaker debt servicing coverage. A prolonged current balance below EUR10m or a sharp rise of debt could be rating-negative. An upgrade of the sovereign to 'BBB+', in conjunction with a stabilisation of Alava's operating balance of at least EUR50m implying a debt payback of less than 10 years, (2013: 5.2 years) could result in Alava's rating being upgraded to 'A'. 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 Ines Callahan Associate Director +34 93 467 87 45 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 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 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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