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Fitch Affirms Italian Region of Sicily at 'BBB'; Outlook Stable
February 24, 2017 / 5:11 PM / 6 months ago

Fitch Affirms Italian Region of Sicily at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, February 24 (Fitch) Fitch Ratings has affirmed Sicily's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' with Stable Outlooks, and Short-Term Foreign Currency IDR at 'F3'. The affirmation reflects our expectation of fiscal performance improvement, driven by a new agreement with the central government to provide additional resources, subject to the region meeting cost and investment objectives. The affirmation also factors in modest direct debt and satisfactory liquidity, while taking into account Sicily's weak economic fundamentals. The Stable Outlook reflects our expectation of no adverse changes to the region's credit fundamentals. KEY RATING DRIVERS Recovering Fiscal Performance Fitch expects Sicily's operating margin in 2016 to have recovered to 3% of operating revenues, net of pass-through and extraordinary items, from a negative five-year 3% average in 2011-2014. The figure should progressively improve towards 5% of operating revenue over the medium term, due to a new bilateral agreement with the national government. According to the agreement, state funding increased to EUR1.4bn in 2016, and will rise to EUR1.7bn annually from 2017, subject to a number of objectives, including cost savings and increasing investments, being met. The healthcare sector, accounting for two thirds of operating revenue as calculated by Fitch, or around EUR9bn, remained balanced in 2016, alleviating the burden on the regional budget. Modest Debt Fitch expects Sicily's stock of debt to have totalled EUR8bn at end-2016 (EUR8.2bn in 2015), corresponding to a moderate 55% of operating revenue, when including EUR2.5bn subsidised loans to pay down commercial healthcare liabilities and EUR135m loans charged to the national government. Fitch expects the operating balance to fully cover interest and principal payment in the medium term, while the national preferential payments mechanism should ensure timely debt repayment if need be, which Fitch expects to account for a moderate 3% of operating revenue. Liquidity remained satisfactory at EUR724m at end-2016, with no credit lines utilised and covering more than 1.5x debt servicing requirements. Improving Economy Sicily's economy suffered from national and regional austerity, with a modest 0.3% GDP growth in 2015 and an expected 0.5% increase in 2016. With a GDP per capita at 65% of Italy's and an unemployment rate twice the national average (22% versus 11%) at end-2016, Sicily's economy remains one of the weaker regions in Italy. However, early signs point to a recovery from 2016, mainly driven by tourism and agriculture. Fitch expects planned regional capital spending of up to EUR10bn by 2020, supported by capital transfers and EU funds. This should stabilise Sicily's recovering economy and help contribute to a stronger tax base over the medium term, despite a significant shadow economy. Neutral Institutional Framework Despite its autonomous status, Sicily remains a contributor to Italy's efforts to balance the national accounts. On the other hand, the national government supports regional efforts to cut spending and improve investments, through the provision of additional resources from 2016 in its revised agreement with Sicily. Moreover, subsidised loans and state-charged debt underpin substantial support from the national government. More Active Management After strengthening constitutional relations with the state, in 2016, the regional administration is committed to streamlining its rigid cost structure dominated by healthcare expenses, interest payments and wages (more than 80% of total), while revitalising the regional economy to support revenue. The administration will spend EUR200m each year for the next 30 years to shrink the region's EUR4bn fund balance deficit, as calculated by Fitch after a one-off payables and receivables revision, partially neutralising the reprieve from increasing resources from the national government. Fitch will monitor the recovery plan implementation and the region's continued cash flow sustainability. RATING SENSITIVITIES Failure to stabilise the operating balance at 3% of revenue, to at least largely cover debt-servicing requirements or unexpected growth of debt towards 75% of operating revenue could lead to a downgrade, especially amid a sluggish economy. Conversely, positive rating action is contingent on the operating margin strengthening towards 10%, and Sicily achieving an overall balanced budget and current surplus matching principal repayment over the medium term. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 87 90 87 261 Fitch Italia S.p.A. 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 Guilhem Costes Senior Director +34 93 323 84 10 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 _id=1019527 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. 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. 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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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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