April 11, 2014 / 3:35 PM / 3 years ago

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

(The following statement was released by the rating agency) MILAN/LONDON, April 11 (Fitch) Fitch Ratings has affirmed the Italian Region of Lazio's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' with Negative Outlooks, and its Short-term foreign currency IDR at 'F3'. The affirmation affects approximately EUR15bn of outstanding debt, including two bonds (XS0198341587, and XS0197857856) for an outstanding amount of EUR224m, as well as future borrowings. KEY RATING DRIVERS The affirmation reflects progress in the restoration of the region's fund balance, after its deficit was halved in 2013 and normalising liquidity. The Negative Outlook factors in heightened risks of prolonged economic weakness amid rising debt and of a rigid budget hampering the restoration of an operating surplus. This could result in Lazio continuing to rely on the subordination of its commercial obligations to debt servicing under Italy's preferential payments mechanism. Debt: To overcome the fund balance deficit of about EUR6bn in 2012 Lazio borrowed EUR3.5bn from the national government at subsidised rates in 2013 and may seek additional EUR3bn-5bn borrowing by 2015. The region stopped borrowing on capital markets since 2011 to avoid penalising market rates, and after reaching borrowing legal limits. Lazio's debt stood at EUR15bn at end-December 2013 and Fitch expects it to rise to around EUR16bn-17bn by 2015, or 110%-120% of the budget, from about 90% in 2012. Economy: Liquidity injections subsequent to the borrowings in 2013-2015 could spur growth among SMEs, two thirds of which are experiencing liquidity stress and the rest facing difficulties in accessing bank credit. Fitch expects GDP to have contracted by 2.5% in 2013 and to grow only 0.5% in 2014, as a freeze on public sector wages and high tax pressure hold back consumption. Low household debt, at 40% of gross value added, and a fairly stable employment base of 2.2 million moderate the impact of the economic slack. Fitch expects Lazio's revenue to rebound to the 2011 level of EUR14bn by 2015, partly due to higher tax rates to absorb cuts in national subsidies. Fiscal Performance: Following years of deficits, Fitch expects Lazio's health sector, which accounts for 80% of the region's budget, to generate a surplus of EUR200m in 2013-2015 as costs stabilise close to EUR11bn and surcharges on personal income tax and business tax are maintained. Barring an unexpected fall in health subsidies stemming from the pending national spending review, the region is considering apportioning part of its future surpluses to Rome's loss-making transport company ATAC to help balance the latter's accounts Fitch expects Lazio's overall operating surplus to average EUR0.5bn, or 4% over 2013-2015, barely covering interest payments. Administration and Management: The health sector in Lazio remains burdened by commercial arrears. Fitch expects disbursement of funds from the national government to help reduce Lazio's payables to EUR3bn by 2015 from the current EUR6bn, provided the region meets financial and operational targets for the health sector. However, with commercial payables expected to remain close to one third of the budget over the medium term, Lazio is facing increasing pressure to meet these payments amid shorter payment settlement days, as required by new legislation, of 60 days from invoice versus Lazio's average of 150. Institutional Framework: The national government continues to be supportive to Lazio; about 90% of Lazio's projected debt by 2015 will be subsidised borrowings from the national government or from the state lending arm, Cassa Depositi and Prestiti. In addition, proposed national legislation is offering an extension of debt maturity, including bonds, by obtaining extra-credit lines from the national government. RATING SENSITIVITIES An operating margin below 5% (end-2012: 3%) may lead to a downgrade as it would be inconsistent with a 'BBB' rating given a rising debt burden to more than 1x the budget. A downgrade may also stem from a weaker resolve in restoring the fund balance, as well as from signs of the preferential payments mechanism being overturned, whereby payment of commercial obligations will no longer be subordinated to financial debt repayment. Conversely, the Outlook may be revised to Stable if the operating margin rises above Fitch's expectations of 5%, leading to a debt to current balance of around 25 years, amid recovery of the economy. This would underpin revenue generation, and hence budgetary performance and debt sustainability. Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch Italia - Societa Italiana per il Rating S.p.A. Vicolo Santa Maria alla Porta, 1 20123 Milan Secondary Analyst Sergio Ciaramella Director +39 02 87 90 87 216 Committee Chairperson Guilhem Costes Senior Director + 34 93 3238407 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 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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