December 9, 2016 / 7:09 PM / in 8 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, December 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 still rather weak fiscal performance in 2015, a high debt burden and 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 Fitch's expectations that the region's fiscal performance will improve gradually while direct debt will remain high until 2017 at 146%-148% of current revenues. KEY RATING DRIVERS Improvement in Operating Performance Under Fitch's base case scenario, La Rioja's operating margin should improve to 3%-5% between 2016 and 2017, from 1% at end-2015. This is based on expected average operating revenue growth (3% yoy) from an improving national economy, and also due to large tax settlements from the funding system corresponding to previous years' revenue. Operating expenditure may grow by a slower 2%-2.5% on average between 2016 and 2017, after the region's management lifted cost-containment policies it had introduced in 2009-2014. Fitch acknowledges that the funding system for Spanish regional governments is likely to be reviewed over the medium term. However, Fitch still does not factor in its projections any change of the system. High Direct Debt Direct debt will remain high in 2016 between EUR1.4bn and EUR1.5bn, or 145%-147% of current revenues, although debt servicing-to-current revenue will fall to 35%-40% for 2016, from 48.2% in 2015. Pressure on debt servicing is high, with overall debt repayment for the next three years of EUR715.2m, or 50.5% of outstanding direct debt at end-2015. However, default risk on market debt is mitigated by the fact that 19% of the direct debt is contracted through the state support mechanism, at subsidised rates. Central Government Support At end-2015, state liquidity mechanisms represented around 19% of outstanding direct debt. This followed the central government's move to ratify its financial support on 23 December 2014, by introducing further measures to ease the debt burden of autonomous communities, including, in 2015, zero-interest loans. As a result, interest costs for La Rioja declined in 2015 to EUR26.6m (from EUR31.6m in 2014). Nevertheless, in 2016, La Rioja has returned to debt capital markets to finance its budgetary needs and debt redemptions. New Regional Government A coalition government in La Rioja was elected in May 2015 between the former centre-right wing party Partido Popular (PP) and the centre wing party Ciudadanos. This resulted in a new political agreement that prioritises social care. The new President is Jose Ignacio Ceniceros, who has expressed a strong intention to comply with fiscal targets. Regional Economy Recovering La Rioja shows a better-than-average economic profile, with a GDP per capita 9.5% above Spain's average and an employment rate of 50% in 2015, compared with the national average of 46%. La Rioja's economy grew 3.2% in 2015 to an estimated nominal EUR7.9bn. The labour market also improved in October 2016 as job creations increased 8% since December 2013, after 12.6% jobs were lost in the preceding five years. La Rioja has a higher share of elderly population than Spain (20% versus 18.4%), which translates into more pressure on social public services. RATING SENSITIVITIES A negative operating balance, possibly driven by a higher-than-expected operating expenditure growth, or a substantial deterioration of the debt servicing-to-current revenue could trigger a negative rating action. The ratings could be upgraded if the regional government reported a positive current balance and reduced direct debt to around 110% of current revenue (2015: 147%). 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 mechanisms. 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. 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