Fitch Affirms Region of Piemonte at 'BBB'; Outlook Negative

Fri Mar 14, 2014 12:39pm EDT

MILAN/LONDON, March 14 (Fitch) Fitch Ratings has affirmed the Italian Region of Piemonte's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' with Negative Outlooks, and Short-term foreign currency IDR at 'F2'. The affirmation affects approximately EUR8.5bn of outstanding debt, including about EUR2bn of bonds, as well as future direct borrowing. KEY RATING DRIVERS Economy: Fitch expects GDP to have contracted by a cumulative 5% in 2012-2013 due to low consumption and falling manufacturing, particularly affecting companies with a low proportion of turnover from foreign markets. A rebound of the industrial sector, burdened in 2009-2012 by low automobile production, could lead to growth of 0.5%-1% in 2014-2015, albeit with a modest impact on the job market. Fitch expects the employment rate to hover around 63% although a growing number of job seekers may push the unemployment rate up to 12.5% in 2014, from 11% in 2013, weighing on tax generation. Fiscal performance: Fitch expects Piemonte's revenue to hover above EUR10bn as an increase in the personal income tax rate will offset stagnant business tax. Preliminary indications point to an operating margin close to 2% in 2013, with the operating balance covering interest expenses. Piemonte has stabilised its health care spending at EUR8.3bn, or 82% of its operating budget, while adding about EUR250m to the nationally designated resources to maintain the sector in balance. Piemonte has overcome the negative operating balance which characterised the region's performance during the 2000s and Fitch expects the region's operating balance to hover at around 2%-3% of operating revenues over 2013-2015. Investment is likely to have fallen close to EUR0.5bn in 2013, halving from 2010, and Fitch expects it to remain subdued over the medium term as the region curtails spending to bring the budget close to balance, a mandatory requirement from 2016. Debt and Liquidity: Bonds and loans increased to EUR8.5bn at the end of 2013 from about EUR6.5bn in 2011-2012 as the region accelerated the draw-down of subsidised loans granted for 2013-2014 by the national government to pay health and non-health spending in arrears, easing liquidity pressures. Fitch forecasts that Piemonte's long-term debt will remain slightly above EUR8bn in 2013-2015, close to 85% of revenue when calculated net of roughly EUR0.5bn subsidised by the national government. At the same time the region has frontloaded the restoration of its unreserved fund balance which moved from a deficit of about EUR2.5bn in 2012 to close to balance in 2013. Although direct debt service charges will account for roughly EUR500m from 2015, or a modest 5% of the budget and the stabilisation of the operating balance at about EUR250m improves debt sustainability, the latter remains fragile with a debt-to-current balance above 100 years in 2014-2015. RATING SENSITIVITIES If Italy's rating was downgraded, Piemonte's rating would be downgraded in parallel, to maintain the one-notch difference with the sovereign, reflecting the region's weak debt service culture following its decision to renege on swap commitments (see 'Fitch Affirms Region of Piemonte at 'BBB+'; Outlook Negative' dated 17 September 2012). Failure to strengthen the operating margin from Fitch's expected 2% over the 2013-2015 amid debt moving close to 100% of revenue could also lead to a downgrade as debt servicing requirements would not be covered by the operating balance and therefore could not be compatible with a 'BBB' rating. Conversely, a conclusion of the commercial dispute with Dexia after Merrill Lynch and Banca Intesa agreeing in 2013 to settle on swap transactions that the region self-declared void in 2012 could lead to a revision of the Outlook to Stable, or eventually even an upgrade if Piemonte manages to strengthen its budgetary performance, improving debt-to-current balance coverage to close to 10 years. Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch Italia S.p.A. Via Morigi 6, 20123 Milan Secondary Analyst Sergio Ciaramella Analyst +39 02 87 90 87 216 Committee Chairperson Christophe Parisot Managing Director +33 1 4429 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. 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