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Fitch Affirms Autonomous Region of Sardinia at 'BBB+'; Outlook Stable
June 23, 2017 / 8:09 PM / in 4 months

Fitch Affirms Autonomous Region of Sardinia at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) MILAN/PARIS/LONDON, June 23 (Fitch) Fitch Ratings has affirmed the Autonomous Region of Sardinia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+' and Short-Term Foreign Currency IDR at 'F2'. The Outlook is Stable. The 'BBB+' rating reflects the high financial autonomy of Sardinia due to its special status, underpinning the region's sound budgetary performance. The affirmation also reflects our expectation that the region's direct debt, although increasing, will remain low, with solid debt ratios and a satisfactory liquidity position. The affirmation further takes into account Sardinia's expected progressive economic recovery supporting the regional tax base. KEY RATING DRIVERS Autonomy Underpins Ratings: Sardinia is rated above the Italian sovereign (BBB/Stable), as its financial and fiscal autonomy entitles the region to receive fixed shares of major national taxes, ranging from 70% of personal income tax (PIT) and car tax, to 90% of VAT. Its constitutionally protected special autonomous status underpins the region's tax resilience, shielding the revenue structure from the risk of unilateral interference from the state, including risks of annual budgetary appropriations. However, stressed sovereign finances mean Sardinia, as with other regions, is a contributor to Italy's consolidation efforts (EUR680 million annually). Fitch therefore limits the uplift above the sovereign rating to one notch to capture potential intervention by the state and the subsequent risk of weakening predictability of inter-governmental relations. Solid Fiscal Performance: According to preliminary figures, Sardinia posted an operating margin of 9% of revenue in 2016, when adjusted by Fitch for non-recurrent revenue and arrears from the national government. Fitch expects Sardinia to post a stable operating balance of 7%-8% in 2017-2019, or EUR500 million, although recovered credits from the state will be reduced. The stabilisation will be supported by the region's robust tax base, including an additional EUR100 million attribution from the national government as a share of principal taxes, and tighter cost control partly offsetting declining fees and transfers. We estimate Sardinia's flexibility accounts for 5% of operating revenue. Fitch estimates regional investments of about EUR3 billion in 2017-2019, mostly financed by EU funds and capital transfers. In line with regional policies aimed at revitalising economy, investments will focus on hospitals, the environment, hydro-geological works and roads. Sustainable Risks, Healthy Liquidity: Sardinia's stock of direct debt at end-2016 remained at EUR1.1 billion, excluding EUR215 million subsidised loans to pay down commercial liabilities, and EUR14 million debt charged to the state. Fitch expects the regional stock of debt, including subsidised loans, to rise towards EUR1.6 billion by 2019, or around a moderate 25% of revenue (21% in 2016), since new debt will exceed principal repayment to finance investments and liabilities. The agency forecasts a payback ratio (debt coverage by the current balance) at less than four years, below the average life of debt of 12 years. The region's cash position declined to EUR60 million at end-2016 from EUR370 million at end-2015, due to accelerated payments to reduce commercial liabilities. We expect liquidity will remain satisfactory over the medium term, covering 1x debt servicing requirements. Slow Economic Recovery: With a GDP per capita at 75% of the EU average and the unemployment rate still above the national level (17.3% in 2016 versus 11.7% nationally), Sardinia's socio-economic profile remains weaker than the national average. Fitch expects slight GDP improvement in 2017, mainly driven by tourism in addition to industry and commerce, offsetting decreasing exports in oil and mining products. Projects of new public infrastructures as well as tax relief and bureaucratic simplifications will be key to revitalising the region's long-term economy and supporting the regional tax base. Active Management Overcomes Challenges: The healthcare sector continued to post a deficit of EUR290 million in 2016 (EUR320 million deficit in 2015), mainly due to high pharmaceutical costs and inefficient hospitals structures. The regional administration aims to reverse the sector deficit during 2017-2019 through cost restraint and a rationalisation of structures and processes. The regional administration has continued to express its commitment to streamline operating costs, while revitalising the local economy to strengthen revenue. Fitch will continue to monitor the recovery of the region's EUR1.2 billion fund balance deficit, including EUR400 million loans not yet drawn down to pay off liabilities, by 2035. RATING SENSITIVITIES Rating actions on Italy will be mirrored in Sardinia's ratings. This is because Sardinia's IDRs move in tandem with those of Italy due to the compression from the sovereign ratings on the region's standalone profile A prolonged economic downturn or economic shock with an unemployment rate above 20% that jeopardises tax revenue generation could result in a downgrade of Sardinia. A structural deterioration of the adjusted operating margin significantly to below 6% over the medium term, with debt rising sharply above 50% of revenue could also lead to a downgrade. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 87 90 87 261 Fitch Italia SpA Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 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#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. 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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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