Fitch Upgrades Madrid and Barcelona to 'BBB+'

Fri May 2, 2014 11:49am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: City of Barcelona and City of Madrid - Rating Action Report here LONDON/BARCELONA/FRANKFURT, May 02 (Fitch) Fitch Ratings has upgraded the City of Barcelona's and the City of Madrid's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB+' from 'BBB'. Fitch has also affirmed their Short-term foreign currency IDRs at 'F2'. The Outlook is Stable. Their respective bond issues/senior unsecured ratings have also been upgraded to 'BBB+' from 'BBB'. Under EU credit rating agency (CRA) regulation, the publication of International Public Finance reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's ratings of the City of Barcelona and the City of Madrid was 3 October 2014. However, following the upgrade of the Spain's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB+'/Stable from 'BBB'/Stable (see 'Fitch Upgrades Spain to `BBB+; Outlook Stable' dated 25 April 2014 at www.fitchratings.com), we have taken a similar rating action on the City of Barcelona and the City of Madrid as they are rated at the same level as the sovereign. A list of rating actions is provided at the end of this commentary. KEY RATING DRIVERS The ratings on Barcelona and Madrid are capped by the sovereign rating, in line with Fitch's rating criteria. Under our criteria, local and regional governments can only be rated above the sovereign in exceptional circumstances. The ratings of Barcelona reflect the city's economic prosperity relative to national levels and its strong budgetary performance and debt metrics. Barcelona is the administrative, political and economic centre of the region of Catalonia. Tourism is an important sector for the city, and the city has one of the most active Mediterranean ports in the cruise business. Last year Barcelona reported a 24.4% current margin, due to a strong 20% yoy increase in transfers from the national government. Under our base case scenario, we expect the current margin to remain above 23%. During the 2009-2013 period, the city's administration was able to balance its account with an average surplus at 2.96% of total revenue. Fitch expects debt to remain moderate in the medium term at 45% of current revenues in 2014. The ratings of Madrid reflect the city's economic prosperity relative to national levels, its enhanced budgetary performance and debt stabilisation. The ratings also reflect Fitch's expectations that the city's current margin will remain strong in 2014 and 2015. Madrid is Spain's political capital, main economic hub and its administrative centre, and hosts a dynamic financial sector. Its current margin was 28.3% in 2013, a sharp reversal from the trend of weak current balances prior to 2011. Madrid's debt is high but Fitch expects this to decline sharply, mainly due to limited investments. Under our base case scenario, we expect debt to fall by 25% to below EUR5bn in 2016. RATING SENSITIVITIES The Stable Outlook is in line with the Outlook on the sovereign. Any downgrade of the sovereign would be reflected by Barcelona and Madrid's IDRs. However, a sovereign upgrade would not automatically result in an upgrade of the cities' ratings, as this would depend on Fitch's assessment of each city's credit profile. Although Fitch presently considers it unlikely, Barcelona's ratings could also be downgraded if its debt repayment increases significantly above the 16% of the city's current balance expected by Fitch for 2014. In the case of Madrid, the ratings could also be downgraded if the city fails to reduce its debt and if the current margin structurally falls to around 5%. The rating actions are as follows: City of Barcelona Long-term foreign and local currency IDR upgraded to 'BBB+' from 'BBB'; Outlook Stable Short-term foreign currency IDR of 'F2' affirmed Long-term foreign currency ratings of bond issues/senior unsecured debt upgraded to 'BBB+' from 'BBB' City of Madrid Long-term foreign and local currency IDR upgraded to 'BBB+' from 'BBB'; Outlook Stable Short-term foreign currency IDR of 'F2' affirmed Long-term foreign currency ratings of bond issues/senior unsecured debt upgraded to 'BBB+' from 'BBB' Contacts: Primary Analyst Guilhem Costes Senior Director +34 93 323 84 10 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85 Barcelona 08008, Spain Secondary Analyst Julia Carner Analyst +34 93 323 8401 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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 'International Local, Regional Governments Rating Criteria outside United States' dated 23 April 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: International Local and Regional Governments Rating Criteria - Outside the United States here Tax-Supported Rating Criteria here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828587 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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