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Fitch Affirms Italian City of Naples at 'BBB-'; Outlook Negative
June 16, 2017 / 8:23 PM / 2 months ago

Fitch Affirms Italian City of Naples at 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW/MILAN/LONDON, June 16 (Fitch) Fitch Ratings has affirmed the Italian City of Naples' Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and Short-Term Foreign Currency IDR at 'F3'. The Outlook is Negative. The issue ratings on Naples' senior unsecured bond have also been affirmed at 'BBB-' The ratings factor in Italy's preferential payment mechanism ensuring timely debt servicing requirements. They also reflect Fitch's expectation of stable operating performance by Naples on an accrual basis in 2017-2019, despite a weak local economy and high direct risk. The Negative Outlook factors in the city's still weak, albeit improving, tax and fee collection rates, and a large fund balance deficit leading to additional pressure on the budget. KEY RATING DRIVERS Persistent Fund Balance Deficit: The administration is committed to improving its weak, albeit improving, collection rate - below 85% in 2016 - exacerbated by a slow local economic recovery. The city's recovery plan was revised and extended to 30 years from the previous 10 years after a EUR690 million fund balance deficit emerged in 2015 following the implementation of new accounting rules. In 2016 the fund balance deficit worsened to EUR844 million, as calculated by Fitch, mainly due to EUR266 million off-balance sheet liabilities. The worsened fund balance deficit adds on average EUR55 million annually to the still rigid budget in 2017-2019, on top of the EUR25 million from the recovery plan. Fitch will strictly monitor adherence to the city's plan of improving the collection rate towards 90% and keeping payables and receivables under control. High Direct Risk: Fitch expects Naples' direct risk to stabilise at around EUR2.4 billion in 2017-2019 net of pre-financing, or about 200% of budget when EUR1.1 billion subsidised loans from Cassa Depositi e Prestiti (CDP, BBB/Stable, the national government financial arm) to pay down the city's commercial liabilities are included. CDP is the counterparty to 75% of Naples' direct risk and almost the entire stock of loans carries fixed interest rates, reflecting a prudent debt management approach. Market debt, however, remains moderately high at 120% of the city's revenue. Fitch assumes that the preferential payment mechanism will continue to guarantee timely debt service payments, as presently defined by national law for local and regional governments (LRGs) experiencing liquidity stress. Stressed Budgetary Performance: Naples' 2016 operating margin was about 9%, after adjusting for difficult-to-collect revenue, which was not sufficient to fully repay interest and debt principal, unless through preferential payments. Declining state transfers and low fiscal flexibility are likely to lead to moderate 1% revenue CAGR in 2017-2019, with potential improvements on tax-evasion fighting policies, while current spending growth should keep pace with recovery of the fund balance annually. Under Fitch's forecasts, the city's EUR1.3 billion capex in 2017-2020 will focus on transportation, extraordinary road maintenance, public lighting and urban renovation. They will be mostly funded by non-debt resources such as EU funds and transfers of about EUR1 billion, sales of real estate assets mainly to institutional counterparties (INVIMIT the governmental real estate fund, and INAIL, social insurance) and new borrowing of around EUR200 million. Below National Average Economy: With nearly 1 million inhabitants, Naples is one of the biggest Italian cities and, although it is the most dynamic and industrialised city in southern Italy, its socio-economic profile remains weak relative to national levels. Naples' official labour market is also underperforming the national economy with an unemployment rate of around 20% (11.7% nationally) and an employment rate of 38% (57.2%). Naples' mild GDP recovery, which started in 2015-2016, is likely to continue in 2017, mainly driven by tourism, industry and commerce, but with weak impact on the city's revenue. A large shadow economy accounting for at least 35% of official GDP helps moderate the impact of a sluggish local economy. Supporting National Government: Fitch views inter-governmental relations as neutral to Naples' ratings. Despite Naples being exposed to the national government's spending cuts, the city benefits from state support, such as equalisation transfers (EUR350 million in 2016, or nearly 30% of operating revenue), to offset its weaker-than-national average fiscal capacity and funding for large projects. Naples also benefits from a recovery plan that is biannually monitored by the national audit body, Corte dei Conti, which aims to smoothly replenish the statutory fund balance deficit over the long-term. RATING SENSITIVITIES Inability to improve tax and fee collection rates on a sustainable base or failure to shrink the fund balance deficit would lead to a downgrade. The ratings could also be downgraded if debt and equivalents rise above 2.5x of operating revenue or if the preferential payment mechanism protecting financial lenders is removed. KEY ASSUMPTIONS Fitch assumes that the existing preferential payment mechanism as defined by national law will continue to ensure timely debt servicing repayment by Naples, albeit stressing the city's commercial liabilities in the medium term if cash flows continue to be weak. Contacts: Primary Analyst Federica Bardelli Associate Director +39 02 879087 261 Fitch Italia S.p.A. Via Morigi 6 Milan 20123 Secondary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 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. 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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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