December 16, 2016 / 5:15 PM / 9 months ago

Fitch Affirms Italian City of Naples at 'BBB-'/Negative

(The following statement was released by the rating agency) MILAN/LONDON, December 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 affirmation reflects Fitch's expectation of stable operating performance on an accrual basis amid a weak local economy, and high direct risk. The Negative Outlook factors in the city's failure to improve tax and fee collection rates, leading to a diverging trend between operating performance on an accrual basis and operating performance on a cash flows basis. KEY RATING DRIVERS Weak Collection Rate In view of Naples' rigid budget Fitch expects the city to keep costs under control, while more reliable forecasts stemming from new accounting rules will help reduce the mismatch between accruals and cash flows, thus allowing the city to maintain a balanced budget. Nevertheless, tax and fees collection remains challenging, exacerbated by a still slow economic recovery. However, Fitch understands from the administration that it is committed to improving its so far weak collection rate (around 80% in 2014-2015), while the agency will monitor the city's cash flow dynamics and adherence to its recovery plan. The latter was revised after a EUR690m fund balance deficit emerged in 2015 following the implementation of new accounting rules. Stable Budgetary Performance Fitch expects stable operating margin, after adjusting for difficult-to-collect revenue, of about 9% in 2016, which should mostly cover the city's debt service requirements. Declining state transfers and low fiscal flexibility due to a weak tax base are likely to lead to a moderate 2% revenue CAGR in 2016-2018 while current spending growth will keep pace with revenue growth. Under Fitch's forecasts, the city's EUR900m capex in 2016-2018 will go towards transportation, extraordinary road maintenance and urban renovation. They will be mostly funded by non-debt resources such as transfers of about EUR600m, sales of real estate assets and new borrowing for almost EUR200m. Moderate Market Debt Fitch expects Naples' direct risk to stabilise at around EUR2.5bn in 2016-2018 (EUR2.6bn at end-2015), or about 210% of budget when EUR1.1bn subsidised loans from Cassa Depositi e Prestiti (CDP, BBB+/Negative, the national government financial arm) to pay down the city's commercial liabilities are included. CDP is the counterparty of 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 continues to assume that the preferential payment mechanism will continue to guarantee timely debt service payments, as presently defined by national law. Weak Economic Fundamentals 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, Fitch views its socio-economic profile as weak relative to national levels. Naples' labour market is also underperforming the national economy with unemployment rate around 20% (10.9% nationally at end-3H16) and the employment rate at 38% (57.6% nationally at end-3H16). Naples' GDP is likely to see a mild recovery in 2016-2017, after several years of recession or stagnation, driven by tourism, industry and partly by commerce, while projects to revitalise the city's port would be key in supporting long-term local economic activity. A large shadow economy helps moderate the impact of the economic weakness. Supporting National Government Fitch considers inter-governmental relations as neutral to Naples' ratings. Despite Naples being exposed to the national government's spending cuts, the city benefits from the state support, such as equalisation transfers (EUR350m 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 monitored by the national audit body, Corte dei Conti, which aims to replenish the statutory fund balance deficit in 30 years. RATING SENSITIVITIES The ratings could be downgraded if debt and equivalents rise above 2.5x of operating revenue. A downgrade could also stem from a failure to improve tax and fee collection eventually leading to a negative operating margin on cash basis. Adverse changes to the preferential payment mechanism protecting financial lenders could lead to a downgrade, possibly by multiple notches. Contact: 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 Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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