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Fitch Affirms Autonomous Community of Castile La Mancha at 'BBB-'; Outlook Stable
January 13, 2017 / 7:08 PM / 7 months ago

Fitch Affirms Autonomous Community of Castile La Mancha at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, January 13 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Castile-La Mancha's (CLM) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F3'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB-'. The affirmation reflects the unchanged 'BBB-' Support Rating Floor being applied to Spanish autonomous communities, including CLM. This supports the 'BBB-' rating, which is stronger than the region's intrinsic credit profile. Fitch will monitor the ongoing debate regarding liquidity support from the central government to Spanish regions. KEY RATING DRIVERS Central Government Support The Support Rating Floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; access to state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF), and the budgetary stability law (BSL), which enforces fiscal discipline on local and regional governments (LRGs). The region held around EUR9.8bn debt from state liquidity mechanisms at end-2016, or approximately 70% of its total debt, illustrating strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years. In Fitch's view, CLM's access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, which as of end-2016 exceeded 25% of outstanding debt. Fitch expects a normal application of the state mechanisms in 2017, after the delays during 1H16 caused by the implementation of reinforced monitoring and fiscal discipline from the Ministry of Finance and Civil Service (MinHap) over Spanish regions. The last instalment of the 2016 state mechanism programme made in December distributed more than EUR4bn among the Spanish regions. Under Fitch's base case scenario, CLM's funding needs of EUR1.8bn in 2017 will rely on the FLA, increasing the weight of state mechanism in the region's total debt. However, CLM is willing to diversify their funding sources and to tentatively tap markets, all within the prudential policy limits in place. Expected improvement in fiscal performance will slow down debt increase, and higher expected operating revenues may have resulted in a slight decline of the debt-to-current revenue ratio in 2016, from 273% in 2015. Current Balance Still Negative Negative current balances since 2008 and a high debt burden mean that the standalone credit metrics of CLM are weaker than its ratings indicate. Fitch expects an improvement of budgetary performance in 2016, due to an additional EUR260m inflow stemming from higher financial system allocations and a positive settlement from 2014, as well as a lower debt burden. Tax reforms leading to a potential annual collection increase of EUR40m are also expected, to a lesser extent, to have contributed to the improvement in fiscal performance. Despite an expected personnel cost increase of close to 5%, CLM will post a smaller negative current margin of around 10% in 2016, versus 13.6% in 2015 according to Fitch's base case scenario. Overall, Fitch's base case scenario forecasts a 2016 fiscal deficit at 0.7%-1%, in breach of the 0.7% deficit target. Slight Fiscal Improvement Ahead The region's government has drafted a budget for 2017, subject to the passing of the national budget of the state and thus confirming financial system allocations. Moreover, as the Socialist Party is governing in minority, it needs support from other parties represented in the regional parliament to pass the 2017 budget. The 2016's budget was rolled over in December 2016 to cover the interim period. Fitch expects CLM to continue improving its budgetary performance in 2017, although the current balance is likely to remain negative. Regional Economy in Recovery CLM has a weaker economic profile than Spain, with a GDP per capita equivalent to 78% of the national average in 2015. Fitch expects nominal GDP to have grown around 3% in 2016, slightly below the national rate, and for this trend to continue. The labour market has also improved as unemployment decreased to 22.7% in 3Q16 (Spain 18.9%), from 24.7% in 3Q15. Exports saw a record 7.5% growth y-o-y as of end-October 2016, although the region still has a trade deficit. RATING SENSITIVITIES As CLM's IDRs are supported by the 'BBB-' Support Rating Floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are withdrawn or if the central government's ability and willingness to continue providing extraordinary support to the regions deteriorates. Discussion on the regional financial system is ongoing in Spain, and changes are in prospect over the medium term. Nevertheless, Fitch believes the revenue of CLM is unlikely to decrease as a result. Contact: Primary Analyst Patricio Novales Analyst +34 93 323 84 17 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 93 323 84 10 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; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@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=1017545 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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