(The following statement was released by the rating agency)
Aug 09 -
Summary analysis -- Navarre (Autonomous Community of) ------------- 09-Aug-2012
CREDIT RATING: A/Negative/-- Country: Spain
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
04-May-2012 A/-- A/--
31-Jan-2012 AA-/-- AA-/--
29-Apr-2010 AA+/-- AA+/--
19-Oct-2007 AAA/-- AAA/--
In accordance with our methodology for rating local and regional governments (LRGs), we rate the Autonomous Community of Navarre above the Kingdom of Spain (BBB+/Negative/A-2). We can rate an LRG up to two notches higher than its sovereign only if we consider that the LRG can maintain stronger credit characteristics than the sovereign in a stress scenario (see “Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign,” published Sept. 9, 2009).
According to our criteria, an LRG can be rated one notch higher than its sovereign if it can maintain credit characteristics that are more resilient than the sovereign’s in a stress scenario, has a predictable institutional framework, and displays high financial flexibility. However, according to our general criteria, a nonsovereign issuer in the eurozone that combines high sensitivity to country risk with concentration ratios ranging between 40% and 69% can be rated up to two notches above its (investment-grade) sovereign (see “Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions,” June 14, 2011).
We believe Navarre meets the abovementioned conditions and therefore apply a two-notch differential to the ratings. Specifically, we believe Navarre has:
-- An export-oriented and competitive industry, focused on internationally diverse markets, which mitigates its concentration on Spain’s economy. Navarre has high GDP per capita (129% of the Spanish average) and lower unemployment rates than Spain, at 16% compared with 24% nationally in first-quarter 2012.
-- Superior financial features, a strong credit culture, and a sound liquidity position, as shown by its high indicative credit level (ICL).
-- Special constitutional and legal status, which gives it strong and predictable fiscal autonomy. This includes fiscal legislation, collection, and administration powers; independent cash management. It also means Navarre makes no substantial equalization transfers to Spain. The status largely isolates the region from negative sovereign intervention.
Under our criteria, our ICL for Navarre is ‘aa-'. The ICL is not a credit rating but instead reflects our view of the “intrinsic creditworthiness” of an LRG, under the assumption that it is not constrained by the sovereign credit rating.
The ICL takes into account our combined assessment of the institutional framework in which the LRG operates, as well as its individual credit profile, which includes our assessment of the LRG’s economy, financial management, budgetary performance, financial flexibility, debt burden, liquidity position, and contingent liabilities.
Navarre’s ICL primarily reflects our favorable opinion of the region’s institutional framework, which gives the region a high degree of fiscal autonomy, and provides the region’s government with incentives to adjust its fiscal performance. The rating is also underpinned by Navarre’s economy, which is wealthier and more competitive and export-oriented than Spain‘s. However, we also view Navarre’s growth prospects as limited, given its close economic ties to Spain.
Navarre’s ICL also factors in our view on the region’s financial management as a “positive” factor for the rating, according to our criteria.
In 2011, Navarre registered operating revenues 8.8% below budget. For 2012, we think that operating revenues could be up to 10% below the initial budget. On the other hand, we also take into account the Navarre government’s quick reaction to lower than expected tax collection, by passing in May 2012 cost-cutting measures amounting to some EUR132 million, or 4.2% of initially budgeted operating expenditures.
Although the specific nature of these measures resulted in the breakup of the region’s coalition government, we expect the minority government of Union del Pueblo Navarro will continue to take any needed expenditure adjustment measures in the face of worse than expected revenues.
We expect Navarre to post a zero or slightly negative operating balance in 2012, before starting to recover gradually in 2013, staying below 3% during our forecast period (2012 to 2014). Our base case assumes that Navarre will gradually improve its budgetary performance by moderating expenditure growth and increasing its revenues by raising taxes and fees. We think these measures could go beyond those contained in the region’s fiscal rebalancing plan, if necessary.
Navarre’s ICL is constrained by an increasing debt burden. We expect tax-supported debt to reach 118% of consolidated operating revenues by 2014. This estimate includes some EUR387 million in financing to be taken on by Navarre between 2011 and 2014 to fund a high-speed rail line. These funds will be reimbursed by the central government, mostly in 2016 and 2017. Net of this effect, we expect debt to reach 107.5% of consolidated operating revenues by 2014.
Navarre’s ICL could weaken if, contrary to our current expectations, the region failed to redress its operating performance and to control its capital expenditures, leading to a gradual reduction in deficit levels. If this were to happen, Navarre’s debt could accumulate faster than we currently expect, and this could lead us to re-evaluate our view on the region’s financial management.
We consider it highly unlikely that the ICL will improve during our forecast period.
Our overall assessment of Navarre’s liquidity is “positive”, as our criteria define the term.
We consider that Navarre’s ability to generate cash internally is limited, given our base-case expectation of continued deficits after investments during our forecast period (which we estimate at EUR468 million for 2012). Nevertheless, we expect that Navarre will have access to about EUR178 million in cash during 2012.
The region benefits from access to external sources of liquidity. We expect Navarre will have about EUR348 million available in credit lines during the year. So far in 2012, the region has managed to increase its credit lines by EUR100 million, and had EUR350 million in fully available lines as of May 31, 2012. Navarre enlarged them further to EUR450 million during June 2012.
With external and internal liquidity sources combined, we consider Navarre will have access to about EUR526 million during 2012. This comfortably covers our estimate of Navarre’s debt service for the 12 months from June 2012 to May 2013, at about EUR297 million, with a 177% coverage ratio.
In addition, we think Navarre could sign additional credit lines if needed.
The negative outlook on the long-term rating on Navarre mirrors that on Spain. If we lowered our ratings on Spain, we would downgrade Navarre, since no LRG can be rated more than two notches above its sovereign, according to our criteria.
Given Navarre’s ICL of ‘aa-', we do not currently envisage a realistic downside scenario in which the region’s ICL would weaken by three notches. We would therefore most likely lower the ratings on Navarre following a downgrade of Spain rather than as a result of a change in the region’s ICL.
We could revise the outlook to stable if we revised the outlook on Spain to stable, assuming Navarre’s overall financial performance and management do not weaken.
Related Criteria And Research
-- Ratings On Spain’s Navarre, Basque Country, And Bizkaia Lowered To ‘A’ After Spain Downgrade; Outlooks Negative, May 4, 2012
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign, Sept. 9, 2009