July 7, 2017 / 8:14 PM / 6 months ago

Fitch Affirms Autonomous Community of Madrid at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, July 07 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Madrid's (Madrid) 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 'F2'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB'. The affirmation reflects Madrid's still weak but improved fiscal performance in 2016, high direct debt, but also a strong economy that is supportive of the ratings. The Stable Outlook reflects Fitch's expectations that the region's fiscal performance will gradually improve and that the regional economy will remain strong, despite an expected moderate rise in direct debt to 180%-183% of current revenue by 2017. KEY RATING DRIVERS Better-than-Expected Budgetary Performance According to Fitch's base case scenario, the region's operating margin will continue to improve to above 2% over the medium term, from 0.65% at end-2016. This is based on expected average operating revenue growth of 2%-4%, stemming from the recovery of the national economy. The regional government approved the 2017 draft budget in March, but this is subject to EUR296 million of additional revenue from the funding system from the initial allocation estimated in the draft budget. Operating expenditure is forecast to increase by a lower 2%-3% in the same period compared with 6.5% in 2016. According to 2016 preliminary accounts, the region achieved a positive operating margin after two consecutive years of negative operating balances (2015: negative 1.1% of current revenue; 2014: negative 3.5%). This was boosted by larger revenue of EUR894 million from the funding system and by interest savings. Madrid posted a smaller-than-expected fiscal deficit equivalent to 10% of total revenue (17% in 2015), excluding new borrowings, due to a significant reduction of financial investments by EUR591 million. Fitch's base case scenario forecasts that the operating balance will be positive over the medium term, after having been negative in four years during the 2010-2015 period. Madrid's current weak fiscal performance is attributed to the current funding system to which the region is a net contributor. This resulted in its funding per capita being 10% below the average of the other 14 regions under the common regime in 2014. Regional Economy in Recovery Madrid has a strong economic profile, with a GDP per capita that was 36.5% above Spain's average in 2016. It is the main political, administrative and economic centre of Spain (BBB+/F2/Stable). Its strong economy is also illustrated by a higher-than-average employment rate of 53.6% in 2016 versus 47.6% nationally. Madrid's economy is recovering as illustrated by a 3.9% GDP growth, yoy in 2016 to an estimated nominal EUR210.8 billion. It was one of six autonomous communities with faster nominal GDP growth from 2015. Madrid created 10.5% more jobs between December 2013 and December 2016, after having shed 9.4% jobs between December 2008 and December 2013, reflecting the economic recovery under way in the region. High and Rising Direct Debt Madrid's estimated direct debt grew to EUR28.6 billion in 2016 (EUR26.9 billion in 2015), although the improvement in current revenue drove direct-debt-to-current revenue ratio lower to 175.3% (180.1% in 2015). Fitch estimates debt will continue rising in 2017 to EUR29 billion-EUR31 billion, or 180%-183% of current revenue. Debt servicing-to-current revenue also declined in 2016 to 15.9% (26% in 2015) but should increase to 18%-19% in 2017. Overall debt repayments for the next three years will total EUR6.5 billion, or 23% of estimated outstanding direct debt at end-2016. However, this is mitigated by Madrid's strong access to external liquidity. Strong Access to External Liquidity Madrid has strong access to capital markets and banks to fund its annual deficit, even during adverse periods. Consequently, it is one of the few Spanish regional governments rated by Fitch that has not utilised the Regional Liquidity Fund state support mechanism. The central government's introduction of Fondo de Facilidad Financiera (FFF) zero interest rate loans to regional governments that complied with stability goals helped to partly ease Madrid's commercial debt financing in 2015. Nevertheless, Madrid in 2016 funded its annual deficit and debt redemption through capital market debt and bank loans with moderate interest rates averaging 1.54% and a long amortisation period. Madrid's debt redemption and budgetary needs in 2017 will continue to be funded by capital markets and banks. RATING SENSITIVITIES A negative operating balance would automatically result in a negative rating action. Direct debt structurally exceeding 200% of current revenue could also trigger a negative rating action. The ratings could be upgraded if the regional government reports a consistently positive current balance and if direct debt-to-current revenue declines on a sustained basis. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to Spanish autonomous communities over the medium term, in particular, through the liquidity mechanism. Discussion on the regional financial system is ongoing in Spain, and changes are in prospect over the medium term. However, Fitch does not factor such changes into Madrid's IDRs but believes revenue is unlikely to decrease as a result of the reform. Contact: Primary Analyst Julia Carner Analyst +34 93 323 8401 Fitch Ratings Espana, S.A.U. 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 Summary of Data Adjustments Fitch has made an adjustment to the official accounts to make Madrid comparable internationally for analytical purposes: -Negative cash in 2014 and 2015 from cash, liquid deposits, and sinking fund was re-classified as short-term direct debt. 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. 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