Fitch Affirms Italian City of Busto Arsizio at 'BBB+'; Outlook Negative

Fri Apr 11, 2014 11:41am EDT

(The following statement was released by the rating agency) MILAN/LONDON, April 11 (Fitch) Fitch Ratings has affirmed the Italian City of Busto Arsizio's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' and its Short-term foreign currency IDR at 'F2'. The rating action affects approximately EUR33m of outstanding debt, as well as future senior unsecured borrowings. The Outlook is Negative, in line with that of Italy's sovereign. KEY RATING DRIVERS Busto Arsizio's ratings reflect its sound but weakening budgetary performance, its tight control over spending, and a moderate and declining debt burden. The ratings also factor in the city's moderate tax leeway. Busto Arsizio's operating margin dropped to 8% (EUR5m) in 2013 from 13% in 2012, as national fiscal adjustments resulted in cuts to subsidies to the city. In addition, declining construction activity nearly halved urbanisation fees to EUR3.5m, which were only partially offset by curtailments in operating expenditure. Nevertheless, Fitch expects the operating margin to consolidate and level off at 10% in the medium term on possible tax hikes (residual leeway of around 7%) and on-going cost savings rationalisation. Fitch does not expect changes to Italian municipalities' revenue structure to materially affect Busto Arsizio's operating surplus. Property tax on primary residences (IMU) was replaced by national transfers in 2013 and by a new service tax which will be levied by cities from 2014 (IUC). Fitch expects that the eventual relaxation of stability pact rules for municipalities would result in Busto Arsizio incurring 10% (EUR12m) of total spending in investments in 2014-2015, up from EUR10m in 2011-2012, relating mainly to maintenance of streets and municipal buildings. Given Busto Arsizio's diminishing asset disposals, Fitch assumes the city will partly fund its investments through new borrowings, totalling EUR15m by 2015, although it also intends to tap project financing. In Fitch's base case scenario, debt will stabilise at EUR35m in the medium term with a debt payback ratio trending towards five years, compared with seven years in 2013, and that the operating margin will fully cover annual debt service by 2015 (0.8x in 2013). Busto Arsizio is a medium-sized city in the prosperous Region of Lombardy with a population of about 80,000. Local GDP per capita was 10% above the EU27 average while unemployment was low at about 9% relative to the national average of 12% in 2013. RATING SENSITIVITIES Busto Arsizio's ratings are vulnerable to a downgrade of the Italian sovereign (BBB+/Negative). A debt service coverage ratio falling below 1x, as well as a substantial deterioration in economic conditions impacting budgetary performance could prompt a downgrade. Conversely, a rating upgrade would be contingent on an upgrade of the sovereign. Contact: Primary Analyst Federica Bardelli Analyst +39 02 87 90 87 261 Fitch Italia - Societa Italiana per il Rating S.p.A. Via Morigi, 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Sergio Ciaramella Director +39 02 87 90 87 216 Committee Chairperson Guilhem Costes Senior Director + 34 93 323 8410 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, and 'International Local and Regional Governments Rating Criteria ' dated 9 April 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria here Additional Disclosure Solicitation Status here ALL 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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