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Fitch Affirms Autonomous Community of Madrid at 'BBB'; Outlook Stable
July 7, 2017 / 8:14 PM / 2 months ago

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

(The following statement was released by the rating agency) BARCELONA, July 07 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Madrid's (Madrid) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) 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 Madrid's still weak but improved fiscal performance in 2016, high direct debt, but also a strong economy that is supportive of the ratings. The Stable Outlook reflects Fitch's expectations that the region's fiscal performance will gradually improve and that the regional economy will remain strong, despite an expected moderate rise in direct debt to 180%-183% of current revenue by 2017. KEY RATING DRIVERS Better-than-Expected Budgetary Performance According to Fitch's base case scenario, the region's operating margin will continue to improve to above 2% over the medium term, from 0.65% at end-2016. This is based on expected average operating revenue growth of 2%-4%, stemming from the recovery of the national economy. The regional government approved the 2017 draft budget in March, but this is subject to EUR296 million of additional revenue from the funding system from the initial allocation estimated in the draft budget. Operating expenditure is forecast to increase by a lower 2%-3% in the same period compared with 6.5% in 2016. According to 2016 preliminary accounts, the region achieved a positive operating margin after two consecutive years of negative operating balances (2015: negative 1.1% of current revenue; 2014: negative 3.5%). This was boosted by larger revenue of EUR894 million from the funding system and by interest savings. Madrid posted a smaller-than-expected fiscal deficit equivalent to 10% of total revenue (17% in 2015), excluding new borrowings, due to a significant reduction of financial investments by EUR591 million. Fitch's base case scenario forecasts that the operating balance will be positive over the medium term, after having been negative in four years during the 2010-2015 period. Madrid's current weak fiscal performance is attributed to the current funding system to which the region is a net contributor. This resulted in its funding per capita being 10% below the average of the other 14 regions under the common regime in 2014. Regional Economy in Recovery Madrid has a strong economic profile, with a GDP per capita that was 36.5% above Spain's average in 2016. It is the main political, administrative and economic centre of Spain (BBB+/F2/Stable). Its strong economy is also illustrated by a higher-than-average employment rate of 53.6% in 2016 versus 47.6% nationally. Madrid's economy is recovering as illustrated by a 3.9% GDP growth, yoy in 2016 to an estimated nominal EUR210.8 billion. It was one of six autonomous communities with faster nominal GDP growth from 2015. Madrid created 10.5% more jobs between December 2013 and December 2016, after having shed 9.4% jobs between December 2008 and December 2013, reflecting the economic recovery under way in the region. High and Rising Direct Debt Madrid's estimated direct debt grew to EUR28.6 billion in 2016 (EUR26.9 billion in 2015), although the improvement in current revenue drove direct-debt-to-current revenue ratio lower to 175.3% (180.1% in 2015). Fitch estimates debt will continue rising in 2017 to EUR29 billion-EUR31 billion, or 180%-183% of current revenue. Debt servicing-to-current revenue also declined in 2016 to 15.9% (26% in 2015) but should increase to 18%-19% in 2017. Overall debt repayments for the next three years will total EUR6.5 billion, or 23% of estimated outstanding direct debt at end-2016. However, this is mitigated by Madrid's strong access to external liquidity. Strong Access to External Liquidity Madrid has strong access to capital markets and banks to fund its annual deficit, even during adverse periods. Consequently, it is one of the few Spanish regional governments rated by Fitch that has not utilised the Regional Liquidity Fund state support mechanism. The central government's introduction of Fondo de Facilidad Financiera (FFF) zero interest rate loans to regional governments that complied with stability goals helped to partly ease Madrid's commercial debt financing in 2015. Nevertheless, Madrid in 2016 funded its annual deficit and debt redemption through capital market debt and bank loans with moderate interest rates averaging 1.54% and a long amortisation period. Madrid's debt redemption and budgetary needs in 2017 will continue to be funded by capital markets and banks. RATING SENSITIVITIES A negative operating balance would automatically result in a negative rating action. Direct debt structurally exceeding 200% of current revenue could also trigger a negative rating action. The ratings could be upgraded if the regional government reports a consistently positive current balance and if direct debt-to-current revenue declines on a sustained basis. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to Spanish autonomous communities over the medium term, in particular, through the liquidity mechanism. Discussion on the regional financial system is ongoing in Spain, and changes are in prospect over the medium term. However, Fitch does not factor such changes into Madrid's IDRs but believes revenue is unlikely to decrease as a result of the reform. 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 Summary of Data Adjustments Fitch has made an adjustment to the official accounts to make Madrid comparable internationally for analytical purposes: -Negative cash in 2014 and 2015 from cash, liquid deposits, and sinking fund was re-classified as short-term direct debt. 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. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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