September 1, 2017 / 8:13 PM / a year ago

Fitch Revises Metropolitan City of Milan's Outlook to Negative; Affirms at 'BBB'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Metropolitan City of Milan - Rating Action Report here MILAN/BARCELONA, September 01 (Fitch) Fitch Ratings has revised the Italian Metropolitan City of Milan's (MCM)'s Outlook to Negative from Stable and affirmed the city's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB' and Short-Term Foreign Currency IDR at 'F2'. The issue ratings on Milan's senior unsecured bond have also been affirmed at 'BBB'. The Outlook revision reflects Fitch's expectation of increased volatility to MCM's operating margins due to national budget consolidation efforts and an evolving institutional framework. As a result Fitch no longer sees MCM's creditworthiness as being aligned with the Italian sovereign's ratings (BBB/Stable). KEY RATING DRIVERS The rating action reflects the following rating drivers and their relative weights: HIGH Evolving Institutional Framework Increased transfers from 2017 and challenges from national budget consolidation are likely to impair MCM's operating performance over the medium term through heightened uncertainty on timely extraordinary relief from the central government, if needed. Metropolitan cities were established in 2014 under a law that reshaped their competencies and scope in a coordinated effort with regions. The resulting expense framework provided some benefits in terms of staff downsizing. However, in some cases this was more than offset by growing transfers of EUR3 billion from 2017 to the central government to consolidate the national budget. Subsequent partial relief granted by the central government since 2015 to provinces and metropolitan cities indicates that the funding scheme may still be evolving. MEDIUM Heavy Transfers Weakening Performance The new framework since the province of Milan was transformed into a metropolitan city in 2015 has structurally weakened its ability to deliver operating margins in line with its historical double-digit performance prior to 2014. This is primarily due to growing transfers, imposed by the reform, of EUR158 million in 2016 and EUR184 million in 2017. This was partially neutralised by extraordinary transfers from the central government totalling about EUR50 million in 2015 and 2016 and an estimated further EUR61 million in 2017, which is pending approvals. Milan's ability to actively respond to stressful scenarios is further impaired by limited leeway on tax revenue from vehicle registration fees and their insurance premiums. Factoring in support from the central government, Fitch expects Milan's operating margin to cover debt servicing obligations by only 1x. LOW Conservative Management MCM actively monitors performance through its budget cycle and has cut expenditure in the face of revenue declines. In particular, the city has cut back staffing and aligned revenue with expenditure to achieve structural balance. Capex, typically for extraordinary maintenance of roads and school facilities, has been downsized although we expect it to return to more sustainable levels of about EUR200 million in three years to close the infrastructural gap. This should be funded by a combination of capital transfers, sale of assets and modest debt of EUR30 million over the span of the investment programme. Debt and Liquidity Debt continues to be on an amortising trend, with a total stock at EUR606 million at end-2016 or nearly 140% of MCM's current revenue, down from EUR629 million in the prior year. If the trend is maintained, MCM's debt should be well below EUR600 million by 2018. The cost of debt service represents a sizable burden and MCM does not expect to raise further debt in 2017. Strong Economy Base MCM is an affluent residential and industrial area with a fully developed tax base, which proved stable and resilient during the last recession. Its better-than-national average GDP fundamentals should allow the local economy to maintain its wealthy indicators (GDP per capita around 50% above the EU29 average). On the back of strong and improving fundamentals, we expect vehicles registration and insurance premiums to grow in the medium term, albeit slowly, given limited leeway on rates. RATING SENSITIVITIES The ratings may be downgraded should funding support from the central government diminish by way of extraordinary transfers. Pending a possible revision of the funding scheme for provinces and metropolitan cities a material relaxation of cost control resulting in the operating balance not being able to fully cover annual debt service or debt-to-current revenue stabling exceeding 140%, may also trigger a downgrade. A sovereign downgrade will also result in a similar action on MCM's ratings. A return to a Stable Outlook may result from a reform of the institutional framework to provide recurring and predictable funding to Italian cities and provinces. Reduction of the city's debt burden leading to a free-up of resources to close the infrastructural gap will also result in positive rating action. KEY ASSUMPTIONS Fitch's scenarios and expectations are based on active support from the central government to ease the financial burden on Milan's budget resulting from transfers towards the national consolidation effort. 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 Guilhem Costes Senior Director +34 +34 93 323 8410 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, 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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