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Fitch Affirms Autonomous Region of Sardinia at 'A-'; Outlook Negative
April 11, 2014 / 3:39 PM / 4 years ago

Fitch Affirms Autonomous Region of Sardinia at 'A-'; Outlook Negative

(The following statement was released by the rating agency) MILAN/LONDON/PARIS, April 11 (Fitch) Fitch Ratings has affirmed the Autonomous Region of Sardinia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A-' and its Short-term foreign currency IDR at 'F2'. The Outlooks for the Long-term IDR are Negative. The action affects EUR1.5bn of outstanding loans and bonds as well as future senior unsecured borrowings. KEY RATING DRIVERS The affirmation reflects Fitch's expectation that Sardinia will maintain a favourable balance of revenue and spending despite growing unemployment, based on its resilient revenues stemming from the region's special statute of autonomy. The Negative Outlook is aligned with that of Italy's sovereign. Fitch does not expect changes to Sardinia's special status, which allows the region to be rated above the sovereign according to the agency's criteria. The region's special status entitles it to receive fixed shares of major national taxes, ranging from 90% of VAT to 70% of corporate income tax (CIT). This revenue structure supports tax resilience, while its larger set of responsibilities compared with ordinary regions allows a better match between revenue and spending. According to preliminary indications, the region posted an operating margin of about 12% on a cash flow basis in 2013, broadly in line with Fitch's expectations. The region has also overcome the fund balance deficit it had accumulated over the past years. This was achieved with an overall budget surplus, supported by lower spending commitments, a solid track record of managing EU funds for capital spending and its solid cash position of about EUR850m at end-2013. Fitch expects that the cuts to the ordinary rate of business tax IRAP by 70% decided by the administration for the period 2013-2015 to reduce Sardinia's tax burden and consequently lift the region out of the recession. The agency forecasts a modest GDP recovery (0.5%) in 2014-2015, which should help reduce the unemployment rate (2013: 16.5%). The oil refinery, green energy, construction and tourism sectors should contribute to stabilising the employment rate at around 50%, or 550,000 employees, sustaining domestic consumption. The region's on-going commitment to tailor investments to non-debt resources will translate into capital spending of 10% of total spending (13% in 2010-2012) in 2014 and 2015, averaging about EUR700m per year. Sardinia is focused on upgrading its ports and airports, and high-speed roads, extraordinary maintenance of school facilities as well as on projects for information and communication technology and R&D, to support tourism and demographic developments. Under Fitch's base case, the region's stock of bonds and loans will stabilise at EUR1.5bn by 2015. The agency expects debt cover by current balance (the payback ratio) to be more than four years for 2014 and 2015, while debt servicing coverage by operating balance should hover at 2x over the medium term. RATING SENSITIVITIES A downgrade of Italy or a structural decline of the operating margin below 5% would be inconsistent with an 'A-' rating and would therefore result in a downgrade of Sardinia's ratings. A downgrade could also stem from a prolonged economic downturn or economic shock such as the possible abolition of the business tax allowance. This would push the unemployment rate towards 20%, jeopardising direct tax revenue visibility. Conversely, a revision of Italy's Outlook to Stable could lead to a similar revision of Sardinia's Outlook, provided its budgetary performance and economic indicators remain in line with Fitch's expectations. Contact: Primary Analyst Sergio Ciaramella Director +39 02 87 90 87 216 Fitch Italia - Societa Italiana per il Rating S.p.A. Via Morigi, 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria 'Tax-Supported Rating Criteria' dated 14 August 2012, 'International Local and Regional Governments Rating Criteria ' dated 9 April 2013 and 'Rating Subnationals above the Sovereign - Outside US' dated 2 May 2012, are available at Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria here Rating Subnationals Above the Sovereign – Outside US 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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