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July 9 (The following statement was released by the rating agency)
Fitch Ratings has revised Gestione Commissariale del Comune di Roma's (GC) Outlook to Stable from Negative and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+'. Fitch has also affirmed the Long-term rating to the two bonds issued by the City of Rome (ISINs: XS0181673798 and XS0097805211) at 'BBB+'. The bonds were transferred to GC's management in 2008.
KEY RATING DRIVERS
The revision of the Outlook reflects the corresponding action on the Republic of Italy (see Fitch Revises Italy's Outlook to Stable, Affirms at 'BBB+' dated 25 April 2014 at www.fitchratings.com), amid Fitch's expectations that the additional liabilities transferred to GC from the City of Rome will not alter GC's balance sheet and its ability to service outstanding financial obligations and pay commercial liabilities. Decree Law 16/2014 transferred about EUR0.6bn of the City of Rome's commercial liabilities to GC, to be funded primarily by an expected higher net present value (NPV) due to from lower rates in discounting future state contributions.
The Italian government has the obligation to make available EUR500m per year in perpetuity and EUR37m from 2014 for 30 years to serve debt incurred by the City of Rome before April 2008 and to pay Rome's commercial liabilities passed to GC. Of the EUR500m, the national government contributes EUR300m, while the city is mandated to provide EUR200m, if there are shortfalls, the national government can withhold up to EUR200m of Rome's annual subsidies/revenue. GC receives the EUR500m net of the portion that the national government uses to directly service GC's lenders for debt incurred since 2011.
Cash generated by receivables (about EUR200m) and borrowing helped reduce payables, which declined to EUR993m in 2013 from EUR1.5bn in 2012, as well as service interest (EUR270m) and principal (EUR250m) relating to Rome's debt incurred before 2008. GC believes it will maintain a 20%-25% haircut on non-financial liabilities by continuing to transact with providers to obtain reductions in commercial liabilities.
Fitch expects the book value of contingent liabilities of about EUR2.6bn and receivables of about EUR2bn in 2013 to have been overestimated. As they will eventually be partly written off by 2016 GC's deficit will decline to about EUR5.5bn, down from nearly EUR7bn in 2013. The NPV of the government's contributions could then generate about EUR4bn, matching the financial debt outstanding at the end of 2016, when the latter is netted off the EUR1.4bn bullet bond. In our simulations, the EUR1.4bn bond due in 2048 would be paid by cashing in the EUR0.5bn contributions due from 2048 onwards.
GC's IDR will mirror that of Italy in light of its nature as a state body. Rating equalisation factors in the government's obligation to service debt incurred by GC from 2011, as well as to make EUR537m available to pay debt incurred by Rome prior to April 2008.
The IDR could be downgraded below that of Italy in case of adverse legal changes to GC's status as a public body. A downgrade could also stem from unforeseen liabilities that jeopardise GC's transformation (likely in 2017) into an amortising vehicle of bonds and loans still outstanding once Rome's payables are paid and receivables collected, or written off. Minor contingent asset and liabilities are likely to be taken over by the City of Rome or the state by then.