October 27, 2017 / 8:33 PM / a year ago

Fitch Affirms Region of Piemonte at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MILAN/PARIS/LONDON, October 27 (Fitch) Fitch Ratings has affirmed the Region of Piemonte's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks and Short-Term foreign-Currency IDR at 'F3'. The issue rating on Piemonte's senior unsecured bond has also been affirmed at 'BBB'. The affirmation reflects the balance of Piemonte's continuing weak operating performance, large budgetary deficit and high debt with strong economic fundamentals and an accelerated economic recovery. The Stable Outlook reflects Fitch's expectation of stabilising operating margins over the medium term. The Short-Term 'F3' IDR reflects the region's volatile liquidity. KEY RATING DRIVERS Stable and Predictable Institutional Framework: A solid legislative framework defines Italian regions' responsibilities and revenue predictability, including access to subsidised loans with long maturities from the central government. Tax-raising flexibility is limited, , but the provision of funding for co-shared responsibilities with the central government on healthcare, and the regions' presence in capital markets are incentives for the central government to provide financial support, in case of need. Italy's Regional Stability and Growth Pact requires regions to run a balanced operating budget, which is a further incentive to cost control. Stagnant Performance, Improving Healthcare: Piemonte's 2016 operating revenue, which was supported by VAT and corporate tax, totalled EUR10.6 billion, making the region a positive net contributor to the regional equalisation fund for healthcare expenses (Fondo Sanitario Nazionale; FSN). The national fund totalled EUR111 billion in 2016, of which EUR8.2 billion or 7.4% of total were allocated to Piemonte, which has formally completed and exited a state-tutorship programme started in 2010, which was designed to restore the operating performance of regions with negative healthcare budgets. The normalised status means the region will receive cash from the central government sooner, accelerating settlement of its healthcare-related payables. Fitch expects Piemonte's operating margins in 2017-2019 to be similar to the three-year average of 4%, on the assumption of continued cost control in healthcare and limited tax power. Given its high debt levels, debt servicing is a major drag on resources that would otherwise be available for capital expenditure. Fitch expects that operating margins to be around 0.9x over the next three years, barely covering interest and principal repayments. Given limited scope for self-funded capital spending, Fitch expects future projects may be funded by either a combination of upper tiers funds from the state or the European Union and assets disposals amounting to approximately EUR100 million over the long term. Slowly Amortising Debt: Piemonte's debt burden is high at EUR10.2 billion at end-2016, including EUR4.6 billion treasury loans. Total debt represents roughly 95% of current revenue, although this is partly mitigated by 72% being either subscribed by the Ministry of Finance and Cassa Depositi e Prestiti (BBB/Stable), the central government's main financing arm for local and regional governments (LRGs). Piemonte is currently assessing its issued guarantees. Indirect debt from controlled entities includes EUR289 million with Societa di Committenza Regione Piemonte (SCR), Piemonte's centralised purchasing arm for goods and services and EUR68 million from Finpiemonte. The region's EUR500 million cash balance at end-2016 marked an improvement from 2015's. Fitch will monitor further structural improvements before upgrading Piemonte's Short-Term IDR. Conservative Management: Fitch views positively Piemonte's commitment to fiscal consolidation by addressing the region's cost structure, especially on healthcare, which will continue to exert pressure on expenditure given an ageing population. The successful implementation of a state-monitored healthcare restructuring marks an achievement for the administration and is factored into our assessment. Resilient Economy: Piemonte is one of the strongest manufacturing Italian hubs. It has a large economy with strong socio-economic wealth indicators as reflected by a GDP per head that is 7% higher than the national average and unemployment structurally below the national level (10% in 2016 versus Italy's 12%). After years of slow economic gains, Fitch expects continued improvement in the economy, sustained by rising exports, higher domestic demand and revived investments. The region's manufacturing-related concentration and strong export orientation leave the economy sensitive to external downturns. RATING SENSITIVITIES Sustained decrease in operating margins below 4% in the medium term can drive a downgrade. In particular, relaxation of spending control is a key risk. An increase of direct debt-to-current revenue above 100% is credit-negative. Although Piemonte's rating is aligned with the Italian sovereign, it is unlikely that an upgrade of the latter would result in a higher rating for the region, unless debt servicing ratios see structural improvements (more than 1x) and operating margins strengthen to 6%-8%. KEY ASSUMPTIONS We assume stability in healthcare financing at the national level, which provides for balanced expenditure and equalisation mechanisms among regions. Contact: Primary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 Fitch Italia S.p.A. Via Morigi 6 Milan 20123 Secondary Analyst Federica Bardelli Associate Director +39 02 879087 261 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com 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. 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