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Fitch Affirms Italian Region of Sicily at 'BBB'; Outlook Stable
July 21, 2017 / 8:16 PM / 4 months ago

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

(The following statement was released by the rating agency) MILAN/LONDON/PARIS, July 21 (Fitch) Fitch Ratings has affirmed Sicily's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' with Stable Outlooks, and Short-Term Foreign Currency IDR at 'F3'. The affirmation reflects Fitch's expectation of gradually strengthening fiscal performance and a balanced budget, driven by increasing and stable allocations from the state, subject to the region meeting cost savings and investment objectives. The affirmation also factors in moderate direct risk and sound liquidity, while taking into account Sicily's weak economic fundamentals. The Stable Outlook reflects our expectation of no major adverse changes to the region's credit fundamentals over the medium term. KEY RATING DRIVERS Towards a Balanced Budget Fitch expects Sicily's operating margin to gradually improve towards 5% of operating revenue by 2019-2020, net of pass-through and extraordinary items, from 2% in 2015-2016 and an average of -3% in 2011-2014. The improvement is driven by a bilateral agreement signed with the national government in 2016, according to which net state funding will progressively increase to EUR1.7 billion annually from 2017. This is subject to a number of objectives, including cost savings and increasing investments, being met. The healthcare sector, accounting for nearly two thirds of operating revenue as calculated by Fitch, or around EUR9 billion, remained balanced in 2016, alleviating the burden on the regional budget, although cost savings failed to be met. Moderate Direct Risk Sicily's stock of debt amounted to EUR8 billion at end-2016 (EUR8.2 billion in 2015), corresponding to half of operating revenue, when including EUR2.5 billion subsidised loans to pay down commercial healthcare liabilities and EUR135 million loans charged to the national government. Fitch forecasts net overall risk, including public sector entities' (PSEs) debt and guarantees, to remain around EUR8 billion in 2017-2019, or below 55% of the regional budget. Fitch expects the operating balance to fully cover interest and principal payment in the medium term, which the agency forecasts to represent a low 3.6% of operating revenue. Sicily's liquidity remained satisfactory at EUR724 million at end-2016, without drawing on its credit lines; this liquidity buffers cover 1.5x debt servicing requirements. Improving Economy With a GDP per capita at about 65% of Italy's and an unemployment rate twice the national average (22% versus 11%) at end-2016, Sicily's economy remains one of the weaker regions in Italy. However, from 2015-2016 GRP showed signs of a recovery. In 2016 positive trends in the tertiary sector, in particular tourism, more than offset industry output stagnation and declining exports (down 17%, except for agriculture and food), leaving regional revenue little changed. As part of Sicily's commitment to the agreement with the national government, Fitch expects regional capital spending to reach up to EUR10 billion during the 2014-2020 planning period, backed by capital transfers and EU funds. This should support a 0.5% recovery in GDP, and together with services and expected export recovery, help strengthen the regional tax base over the medium term, despite a significant shadow economy and some corruption preventing full efficient use of available resources. Neutral Institutional Framework Despite its autonomous status, Sicily continues to contribute to Italy's efforts to balance the national accounts. On the other hand, the national government supports regional efforts to cut spending and improve investments, through the provision of additional resources from 2016 in its revised agreement with Sicily. Moreover, subsidised loans and state-charged debt underpin substantial support from the national government. Challenging Management The fund balance deficit, as calculated by Fitch, shrank less than expected in 2016 to EUR3.5 billion due to restated provisions aimed at ensuring an adequate buffer against possible adverse future events. Annual fund balance deficit recovery accounts for about EUR200 million until 2045, partially neutralising the reprieve from increasing allocations from the national government. Fitch will monitor the recovery plan implementation and the region's constant cash flow sustainability. After strengthening constitutional relations with the state in 2016, the regional administration is committed to streamlining its rigid cost structure dominated by healthcare expenses, interest payments and wages (more than 80% of total), while revitalising the regional economy to support revenue. RATING SENSITIVITIES Failure to stabilise the operating balance at 3% of revenue, to at least largely cover debt-servicing requirements or unexpected growth of debt towards 75% of operating revenue could lead to a downgrade, especially if the economy remains sluggish. A downgrade of Italy would also lead to a downgrade of the region. Conversely, a sovereign upgrade could result in the same action on Sicily provided the regional operating margin strengthens towards 10%, and Sicily achieves an overall balanced budget and current surplus matching principal repayment over the medium term. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 87 90 87 261 Fitch Italia SpA 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 Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@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 Solicitation Status here#solicitation 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. 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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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