June 9, 2017 / 8:14 PM / in 2 months

Fitch Affirms Autonomous Community of La Rioja at 'BBB'; Outlook Stable

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(The following statement was released by the rating agency) BARCELONA, June 09 (Fitch) Fitch Ratings has affirmed the Autonomous Community of La Rioja'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 ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB'. The affirmation reflects La Rioja's significantly improved fiscal performance in 2016 from a rather weak result in 2015, a high debt burden as well as financial support from the central government. The ratings also take into account the region's economic outperformance versus the national economy. The Stable Outlook incorporates our expectations that the region's fiscal performance will continue improving while direct debt will rise but remain below 140% of current revenues until 2019. KEY RATING DRIVERS Improved Budgetary Performance In Fitch's base case scenario, the region's operating margin will range between 6% and 8% in 2017 and 2019, up from 4.6% at end-2016. We expect operating revenue to continue to grow in 2017, driven by improving national economy. The regional government approved the 2017 draft budget in March, but this is subject to EUR14 million of additional revenue from the funding system from the initial allocation estimated in the draft budget. Operating expenditure is estimated to grow 2.5%-3.5% in 2017, or an accumulated 12% from 2014. After four consecutive years of posting negative current balances, the regional government has achieved, according to 2016 preliminary accounts, a positive current balance equivalent to 2.9% of current revenue (-1.7% in 2015). This was boosted by larger revenue from the funding system from 2016 of EUR75 million and by interest subsidy from Spain's liquidity support mechanism in 2015. In Fitch's base case scenario, the current balance will be positive over the medium term at 5%-6% of current revenue. Rising Direct Debt In Fitch's base case scenario, direct debt is expected to increase to over EUR1.5 billion and EUR1.6 billion between 2017 and 2019, although expected improvement in current revenue will drive direct debt-to-current revenue ratio below 140% until 2019. Direct debt-to-current revenue fell to 143% in 2016 from 147% in 2015 and debt servicing-to-current revenue fell to 30% from 48% over the same period. Pressure on debt servicing is high, with overall debt repayments for the next three years totaling EUR678 million, or 46% of outstanding direct debt at end-2016. However, refinancing risk on market debt is mitigated by 19% of the direct debt being contracted through the state support mechanism, at subsidised interest rates. Central Government Support The central government continues to provide financial support to autonomous communities. As a result, interest costs for La Rioja declined in 2016 to EUR19 million from EUR32 million in 2014. La Rioja's average life of debt is short at three years. Nevertheless, the regional government has large access to external liquidity so that it can roll over debt in the medium term. In 2016, it funded its annual deficit and debt maturities through capital market debt and bank loans bearing moderate interest rates. Regional Economy Recovering La Rioja shows a better-than-average economic profile, with a GDP per capita 7.2% above Spain's average and a higher employment rate of 51.2% in 2016, compared with the national average of 47.6%. La Rioja's economy grew by a more moderate 1.8% in 2016, to an estimated nominal GDP of EUR8 billion, compared with national growth of 3.6%. The labour market also improved in December 2016 as job creations increased 8% since December 2013, after 12.6% jobs were lost in the preceding five years. In 2016, 20% of the regional population (total population of 0.3 million) was over 65 years old (up 17% since 2002), which translates into more pressure on social public services. RATING SENSITIVITIES A negative operating balance, possibly driven by higher-than-expected operating expenditure growth, or direct debt exceeding 150% of current revenue could trigger a negative rating action. 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 (2016: 143.3%). KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to the Spanish autonomous communities over the medium term, in particular, through the liquidity mechanism. 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 La Rioja's IDRs. Contact: Primary Analyst Julia Carner Analyst +34 93 323 8401 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: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@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#solicitation 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. 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