December 1, 2017 / 9:09 PM / a year ago

Fitch Affirms Autonomous Community of Cantabria at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, December 01 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Cantabria's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F2.' The affirmation reflects Cantabria's improved fiscal performance in 2016, and expected financial support from the central government as well as a high debt burden. The Stable Outlook incorporates our expectations that the region's fiscal performance will continue improving and direct debt will moderately decline below 130% of current revenue by 2019. KEY RATING DRIVERS Expected Budgetary Performance Improvement The regional government presented its 2018 draft budget in November and in Fitch's base case scenario, the region's operating margin will range between 5% and 8% in 2017-2019, up from 2.3% at end- 2016. We expect operating revenue to continue to grow an average of 5.5% yoy in 2017-2019 due to economic growth. Operating expenditure is envisaged to continue rising in the medium term at 2.5%-3% per year, compared with 3% in 2016. Overall Fitch expects that the current balance will continue to be positive over the medium term, at 5%-7% of current revenue. After two consecutive years of negative current balances, the regional government achieved, according to 2016 accounts, a positive current balance at 0.5% of current revenue (-0.1% in 2015). This was boosted by larger revenue from the funding system in 2016 of EUR51 million and by interest subsidies from Spain's liquidity support mechanism in 2015. Stabilisation of Direct Debt Ratio The region is entitled to receive in 2017 close to EUR330 million from the Regional Liquidity Fund (FLA) to cover debt maturities, sufficient to cover long-term debt redemptions of EUR319 million. In Fitch's base case scenario, direct debt is expected to increase to over EUR2.8 billion-EUR2.9 billion between 2017 and 2019 (EUR2.6 billion or 133.3% of current revenue in 2016). However, its relative weight to current revenue is likely to decline to 128%-132% due to expected improvement in current revenue until 2019. Pressure on debt servicing is high, with overall debt repayments for the next three years totaling EUR1.1 billion, or 43% of outstanding direct debt at end-2016. However, refinancing risk on market debt is mitigated by a high 73% of Cantabria's direct debt being contracted through the state support mechanism, at subsidised interest rates. Central Government Support The regional government held EUR1.9 billion in debt from state liquidity mechanisms at end-2016 (a high 73% of its total outstanding direct debt), illustrating strong support from the central government. As a result, Cantabria's interest costs declined in 2016 to EUR47 million from EUR81 million in 2014. State liquidity provided to Cantabria in 2017 is at a favourable average interest rate of 0.852%, which helps limit debt service as a share of current revenue at 17%-18% (15.6% in 2016). Regional Economy Recovery Cantabria's economy grew 2.6% in 2016 to an estimated nominal GDP of EUR12.5 billion. The regional labour market improved as job creations in October 2017 had increased 10% since December 2013, after 16% of jobs were lost during 2007-2013. Cantabria is facing growing pressure from social spending due to its rising population, including of the elderly. However, it benefits from a high standard of living and a strong industrial sector, which contribute to job opportunities in the region. RATING SENSITIVITIES The ratings could be upgraded if the regional government continues to report a positive current balance and reduces direct debt towards 110% of current revenue. A negative operating balance or direct debt exceeding 150% of current revenue could trigger a negative rating action. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to the Spanish autonomous communities over the medium term, in particular, through liquidity mechanisms. Discussions on the regional financial system are ongoing in Spain, and changes are likely over the medium term. However, Fitch does not factor such changes into Cantabria's IDRs. Contact: Primary Analyst Julia Carner Analyst +34 93 323 8401 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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