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Fitch Revises Autonomous Community of the Canary Islands' Outlook to Positive; Affirms at 'BBB'
October 20, 2017 / 8:22 PM / a month ago

Fitch Revises Autonomous Community of the Canary Islands' Outlook to Positive; Affirms at 'BBB'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Autonomous Community of the Canary Islands - Rating Action Report here BARCELONA, October 20 (Fitch) Fitch Ratings has revised the Autonomous Community of the Canary Islands' Outlook to Positive from Stable while affirming the region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB'. The Short-Term Foreign Currency IDR has been affirmed at 'F3'. The 'BBB' ratings on the Canary Islands' outstanding senior unsecured bond issues have also been affirmed. KEY RATING DRIVERS The change in the Outlook of the Canary Islands' IDRs reflects the following key rating drivers and their relative weights: HIGH The Canary Islands' budgetary performance improved steadily over 2012-16, driven by higher tax revenue, and is expected to consolidate a current balance surplus of close to 5% over the medium term. This will be bolstered by further growth in tax revenue and revenue from the regional financial system. The region's outermost status within the EU allows the Canary Islands to collect some of its indirect taxes, notably the general indirect Canarian tax (IGIC), in contrast to the rest of autonomous communities of the common regime. Strong regional GDP growth of 4.2% in 2016, driven in particular by consumption, allowed the region's operating performance to continue its positive trend from 2012, including 20.5% growth in operating revenue over 2012-16. The Canary Islands posted an operating margin of 5.8% in 2016, a substantial improvement from 1.9% in 2015, and above our expectations. This was boosted by higher self-collected taxes and higher transfers from the financial system, as the region received additional current transfer funds to cover general operating costs. In Fitch's base case scenario, the region's operating margin will range 7%-8% over 2017-18. The region's 1H17 results show a current margin of around 9.2%, according to the Ministry of Finance and Civil Service. We expect operating revenue to continue to grow in 2017, driven by economic momentum and higher funds from the financial system of EUR403 million (equivalent to roughly 6.7% of operating revenue in 2016). A further growth of close to EUR300 million in resources from the financial system is expected in 2018, associated with similar increases in opex and capex. The Canary Islands has also met its progressively tight financial goals since the Budgetary Stability Law came into force in 2012, and the region posted an overall fiscal deficit of 0.33% in 2016, the smallest among Spanish regions, and is on track to meet its target of 0.6% for 2017. MEDIUM Direct debt was EUR6.7 billion at end-2016, a rise of over EUR0.1 billion since 2014. More than half of its direct debt is contracted through the state mechanisms, notably the Financial Facility Fund (FFF) and the Regional Liquidity Fund (FLA). The relative weight of state liquidity decreased as a result of higher current revenue, so that total debt-to-current revenue was 111.6% in 2016 (118.1% in 2015). The region is entitled to receive close to EUR0.9 billion from the FFF in 2017, sufficient to cover its funding needs. Fitch expects direct debt to stabilise from 2017 at around EUR6.9 billion, helped by higher operating and capital revenue, fully funding the region's investment needs. The expected improvement in current revenue and the current balance will drive direct debt and the payback ratio towards 100% of current revenue and 15 years, respectively, over the medium term. With a population of 2.1 million, the Canary Islands have a weaker economic profile than Spain with a GDP per capita equivalent to 83% of the national figure, which is average by international standards. Its economy is concentrated in the services sector, mainly tourism, accounting for a third of regional GDP at EUR42.6 billion. Tourism has fuelled economic growth over the last five years, making the Canary Islands one of the top performers in nominal GDP growth within the Spanish regions. The number of visitors grew 4.2% during 8M17, and overnight stays increased 2.5%, extending its growth trend since 2013. GDP growth is forecast at around 3% in 2017-2018. The regional administration has demonstrated an ability to control opex and capex proportionate to revenue collection, avoiding budget slippages and paying its commercial liabilities on time. Revenue forecasts are conservative. The budget for 2018 has been already drafted, ahead of most autonomous communities in Spain. RATING SENSITIVITIES The ratings could be upgraded on a structural positive current balance with direct debt stabilising at 100% of current revenue on a sustained basis. The Outlooks will be revised to Stable if debt-to-current revenue fails to revert towards 100% over the medium term. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to the Spanish autonomous communities over the medium term, in particular, through the liquidity mechanism. Discussions on the regional financial system are ongoing in Spain, and changes are in prospect over the medium term. Nevertheless, Fitch does not expect the Canary Islands' revenue to decrease as a result. Contact: Primary Analyst Patricio Novales Associate Director +34 93 323 8417 Fitch Ratings Espana. S.A.U. Avda. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Christophe Parisot Managing Director +33 1 44299134 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 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. 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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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