Fitch Downgrades City of Turin to 'BBB'; Outlook Stable

Fri May 2, 2014 12:18pm EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: City of Turin - Rating Action Report here MILAN/LONDON, May 02 (Fitch) Fitch Ratings has downgraded the Italian City of Turin's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB' from 'BBB+' and its Short-term foreign currency IDR to 'F3' from 'F2'. The rating action affects EUR3.5bn of outstanding long-term liabilities, including a bond of nominal EUR355m at issue (XS0373247104), as well as future senior unsecured borrowings. The Outlook is Stable. The rating action reflects the following rating drivers and their relative weights: KEY RATING DRIVERS The downgrade reflects Turin's overall long-term liabilities overshooting Fitch's projections, amid protracted tight liquidity. This tight liquidity was a result of weaker tax and fee collection rates as well as curtailed revenue due to legislative changes by the national government. The Stable Outlook reflects a balance of risks between potentially stronger operating performance if the city improves its tax collection with risks that prolonged economic weakness may weigh on revenue generation. Currently, Turin faces a 5% gap between the taxes levied and collected. High: Debt: Turin's stock of loans and bonds stood at EUR3.095bn at end-2013, net of EUR115m loans subsidised by the national government. This compares with Fitch-calculated debt liabilities of EUR3.55bn, which include EUR238m borrowings from Cassa Depositi e Prestiti to pay down commercial liabilities and EUR90m short-term debt to overcome delayed inflows pending the finalisation of legislation on property and waste collection taxes. Fitch's revised projections see Turin's debt stabilising at EUR3.5bn-3.6bn or 2.5x current revenue over the medium term. Debt sustainability remains weak with the debt payback ratio at close to 50 years of the current balance. Medium: Finances: Turin's operating margin, which official figures put at close to 20% for 2009-2013, declines to 15% when adjusted for taxes and fees accrued but not collected. Fitch does not expect the city's margin to improve significantly over the medium term. Annual debt servicing requirements for interest and principal of about EUR250m will therefore only be 80% covered, leaving Turin's timely debt servicing partly dependent on capital revenues. Fitch understands that Turin's investment will be restricted to around EUR100m per annum, keeping the budget close to balance. The revision of the property tax may provide fiscal leeway. Nevertheless the budget remains rigid, as potential tax hikes may be difficult amid ongoing economic weakness. Turin's IDRs also reflect the following key rating drivers: Economy: Following the contraction of GDP of 1.5% in 2013, with the unemployment rate at around 11% (Italy: 13%), there is some slack in the economy. Fitch believes it will remain weak in 2014 with GDP rising about 0.5% and is therefore unlikely to be supportive of tax proceeds. Fitch expects Turin's operating revenue to be close to about EUR1.3bn per year for the 2014-2015 period. Management: Turin's management continue to keep a tight grip on costs, with operating spending expected by Fitch to stabilise at about EUR1.05bn over the medium term, due to further cost streamlining, particularly in personnel and purchase of goods and services. Liquidity remains weak as the administration's asset sales programme continues to fall short of expectations. Reserves were exhausted in 2010 to pay down commercial liabilities and Turin's plan had been to replenish liquidity with asset sales. However, asset sales have been slower than expectations, such as the divestment of stakes in transport company GTT, which is delayed by cumbersome procedures and weak demand. Institutional Framework: The institutional framework remains a neutral factor for Italian municipalities. The revision of property and waste collection taxes is aimed at raising Italian cities' financial autonomy. This benefits cities with a stronger socio-economic profile, such as Turin, making them less dependent on national subsidies. However, weak operating cash flow generation translates into a rather rigid stock of payables, of about EU600m or 0.5x of the budget, leaving Turin's timely debt servicing somewhat reliant on preferential payments. RATING SENSITIVITIES Turin's ratings, could be downgraded if the operating margin weakens further towards 10%, and/or if debt continues to climb from the current EUR3.5bn level. Turin's Outlook could be changed to Positive if the city manages to reduce its financial and commercial debt stock on a sustained basis, with the debt-to current balance ratio trending towards 25 years. Contacts: Primary Analyst Federica Bardelli Analyst +39 02 87 90 87 261 Fitch Italia - Societa Italiana per il Rating S.p.A. Via Morigi, 6 20123 Milan Secondary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 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 at www.fitchratings.com. Applicable criteria 'Tax-Supported Rating Criteria' dated 14 August 2012 and 'International Local and Regional Governments Rating Criteria' dated 23 April 2014, are available at www.fitchratings.com Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828594 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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