Fitch Affirms Autonomous Community of Murcia at 'BBB-'; Outlook Stable

Fri Aug 22, 2014 2:09pm EDT

(The following statement was released by the rating agency) BARCELONA/MILAN/LONDON, August 22 (Fitch) Fitch Ratings has affirmed the Spanish Autonomous Community of Murcia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. The rating action affects around EUR5.1bn of outstanding debt. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. KEY RATING DRIVERS Murcia's ratings reflect its increasing debt burden and a weaker economic profile than Spain, with a GDP per capita equivalent to the 80% of the national average. The ratings take into account a still fairly high level of debt in relation to current revenue but also factor in the region's strong commitment to comply with fiscal targets. Murcia's standalone credit metrics are weaker than its ratings would indicate due to its structural negative operating and current balances reported since 2010. Its budget deficit was fairly large over 2010-2012 but Fitch expects this to continue to narrow, due to a macroeconomic improvement, increased taxes and expenditure constraint, among others. Murcia's ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities, and despite the recent upgrade of Spain to 'BBB+', Fitch has decided to leave the floor unchanged at 'BBB-'. The rating floor is based on a number of supporting factors that contribute to improving liquidity and reducing the likelihood of default by a region. These include the budgetary stability law and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; the existence of the Regional Liquidity Fund (FLA) and that negative tax settlements can now be paid over a 20-year period, easing liquidity for Spanish regions. In Fitch's view, access to the FLA will continue to ensure timely debt servicing for Murcia. Since 2012, the region has received a total of EUR3.5bn from state support mechanisms, including the FLA established by the central government to cover debt repayment of Spanish regions facing difficulties in accessing capital markets, and the FFPP, a mechanism to help regions pay their arrears to suppliers. Debt contracted under both mechanisms, which are to be repaid evenly within 10 years, accounted for 47% of total debt at end-2013, an illustration of strong support from the central government. On 31 July the Ministry of Finance and Public Administration introduced further measures to ease liquidity for autonomous communities that had made use of the FLA. The repayment period was extended to 11 years and interest rates for debt contracted in 2012 were reduced to 1% from 5.18%, easing liquidity and interest repayments. It has been estimated that Murcia as a result may benefit from EUR71m savings in 2014 and 2015. As Murcia failed to meet its regional GDP target of 1.6% in 2013 the region had to present a rebalancing plan for 2014-2015. Fitch believes Murcia will post a positive, albeit weak, operating balance over the next two years. At end-2013, the region's total direct debt totalled EUR5.1bn, including EUR532m coming due in 2014. Fitch expects debt to continue rising, albeit at a slower pace, with direct debt increasing to EUR6bn by end-2015 or 175% of current revenue, due to large recurrent budget deficits, compared with only 15% in 2008. This would be equivalent to 23% of regional GDP, just above the 22.3% target set by the central government in July 2014. Murcia's unemployment rate was 29.3% in 2013 (3% higher than in Spain), and house prices 34% below the Spanish average. RATING SENSITIVITIES Fitch will review the rating floor if state support measures are cancelled or if there is a diminishing of the central government's ability and willingness to continue providing extraordinary support to the regions. If the floor is removed, Murcia's rating is likely to be downgraded unless it is able to report a structural positive current balance. RATING ASSUMPTIONS A new financial system for Spanish regions is under debate, but it is too early to determine its impact for Murcia. Contact: Primary Analyst Guilhem Costes Senior Director +34 93 323 8410 Fitch Ratings Espana. S.A.U. Paseo de Gracia, 85, Barcelona 08008, Spain Secondary Analyst Ines Callahan Associate Director +34 93 467 8745 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, and "International Local and Regional Governments Rating Criteria outside United States", dated 23 April 2014, are available on 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 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. 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