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Fitch Affirms Italian Region of Lazio at 'BBB'; Outlook Stable
February 24, 2017 / 5:06 PM / 10 months ago

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

(The following statement was released by the rating agency) MILAN/LONDON, February 24 (Fitch) Fitch Ratings has affirmed Lazio's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' with a Stable Outlook, and Short-Term Foreign Currency IDR at 'F3'. The affirmation affects the region's senior unsecured debt, including two bonds (XS0198341587, and XS0197857856) for an original amount of EUR300m. The affirmation reflects our expectations that the region's operating balance will cover debt servicing requirements over the medium term. The Stable Outlook balances the risk of rising direct debt or a reverse of the policy to gradually overcome the fund-balance deficit with the benefit of a potentially stronger than-expected 8% operating margin. KEY RATING DRIVERS Fiscal Performance (neutral): Fitch expects the Region of Lazio's operating surplus to hover above EUR1bn, or 8% of revenue over 2017-2019, in line with preliminary figures for 2016. The region aims to offset a 1% growth in national allocations for healthcare from 2017 with a partial removal of the personal income tax increases passed in 2015. The latter will allow the city headroom for future tax increases if need be. The eventual sale of real estate assets would allow for enlarged capex which nonetheless remains fairly compressed at a low 5% of total spending. Operating spending growth maintained at about 1% per annum contributes to a budget being close to balance, which nevertheless remains rigid as underscored by an ongoing fund deficit. Preliminary figures for 2016 suggest the latter has shrunk close to EUR1bn or 7% of revenue, on Fitch's calculation basis, which excludes nearly EUR0.5bn of perenti (long-standing, unused commitments for investments) and EUR9.5bn of subsidised loans from the national government to accelerate commercial payments in 2013-2015. Debt (weakness): Lazio's financial debt grew to EUR21.5bn in December 2016, nearly 1.5x operating revenue, up from EUR20.5bn in December 2015 as the region funded capex already committed, hence narrowing the fund deficit. Fitch expects financial debt, including subsidised loans, to remain high at about EUR21bn, nearly 1.5x operating revenue in 2017-19. Weak debt sustainability, as measured by a debt-to-current balance ratio of around 40 years, is offset by a low (10%) proportion of market debt on the region's balance sheet. Lazio's EUR15bn of 30-year maturity, state-subsidised and mostly fixed-rate loans contribute to the debt's extended average life of about 17 years, stabilising debt servicing requirements at 8% of revenue. Management (neutral): Fitch's assessment remains underpinned by Lazio's policy to gradually replenish the fund balance, removing a source of cash tension, amid sound budgetary planning and execution capacity. The health care sector is now nearly balanced without the contribution of tax surcharges and Fitch expects a continued grip on Lazio's network of public sector entities, translating into low regional indirect debt and guarantees granted to support their operations/capex. Economy (strength): Lazio's GDP grew around 1.5% in 2016, according to Fitch's preliminary estimates, underpinned, among others, by pharmaceuticals and car manufacturing, while the employment base stagnated close to 2.35 million Fitch expects Lazio's economy to expand about 1% in 2017, supporting revenue growth towards EUR15bn over the medium term, from EUR14.5bn in 2015-16. Despite the subdued economic growth expected over the medium term, Lazio's above-EU average socio-economic wealth indicators and diversified economy largely underpin the region's revenue-raising potential. Institutional framework (neutral): Fitch assesses Italian inter-governmental relations as "neutral" to Lazio's ratings. Weak enforcement of prudential regulation aimed at preserving fiscal balances can, at times, lead to off-balance sheet liabilities, such as Lazio's fund balance deficit, as well as healthcare deficits in previous years. However, legislation prioritises the repayment of financial over commercial liabilities in case of liquidity stress. Furthermore, the national government usually intervenes with corrective budgetary measures when a subnational finds itself unable to deliver basic services. RATING SENSITIVITIES A fall in the operating margin to around 5% or unexpected widening of the fund balance deficit could result in a downgrade. Sustained economic recovery buoying revenue growth, with the operating margin exceeding 10% or debt liabilities on a downward trend towards 1x operating revenue could lead to a positive rating action. Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch Italia - Societa Italiana per il Rating 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 34 93 323 8410 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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=1019525 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. 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