February 24, 2017 / 5:07 PM / 6 months ago

Fitch Affirms Italian Region of Marche at 'BBB+'; Outlook Negative

(The following statement was released by the rating agency) MILAN/LONDON, February 24 (Fitch) Fitch Ratings has affirmed the Italian Region of Marche's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB+' with Negative Outlook and Short-Term Foreign Currency IDR at 'F2'. The issue ratings on Marche's senior unsecured bonds have also been affirmed at 'BBB+'. The affirmation reflects Marche's low debt and contingent liabilities, solid liquidity amid sound operating performance, including a balanced healthcare sector, and the administration's proactive management. The Negative Outlook is in line with that of Italy, which acts as a cap on Marche's ratings based on Fitch's methodology. KEY RATING DRIVERS Low Debt, Solid Liquidity Under Fitch's central scenario Marche's direct debt will remain at a low 30% of current revenue in 2016-2018, or about EUR1.2bn. Direct debt amounted to EUR1.03bn at end-2015, including outstanding EUR506m bullet bonds (gross of EUR320m provisions made for repayment at maturity) and EUR46m loans owed to the state. Marche has 80% its bonds and loans at fixed interest rates and debt service requirements absorb less than 3% of operating revenue. Fitch expects Marche's liquidity to remain sound in 2016-2018, broadly in line with the region's average cash balance of nearly EUR350m in 2015, and covering debt service by 3.5x. Solid Budgetary Performance The region retains a solid capacity to manage risks associated with a normal economic cycle given its prudent budgetary management, low revenue volatility and legal tax-raising capacity. Under Fitch's base case scenario, Marche is expected to post a stable medium- term operating balance of around EUR160m (or 5% of revenues), due to tight cost control and a resilient tax base. This will ensure solid debt servicing with a debt payback of 10 years, approximately matching the average life of the region's debt. Despite an investment plan of around EUR800m over 2016-2018, Fitch expects Marche to maintain a balanced budget through a prudent combination of debt and non-debt resources. Proactive Management The administration has continued to express its commitment to preserving the region's stable operating performance by maintaining a balanced budget, including on the healthcare sector, which absorbs 80% of the budget. The regional administration focuses on enhancing economic development through tax relief and upgrades of infrastructure such as roads and new hospitals. A positive free fund balance of around 5% of operating revenue and adequate cash balance (EUR350m) underscore the region's conservative management, which should help maintain financial stability through the economic cycle. Neutral Institutional Framework Marche's profile is constrained by Italy's ratings (BBB+/Negative). This reflects the cap at the sovereign rating for ordinary statute regions, as they lack the financial autonomy that can isolate their finances from the national government and make them eligible for a rating higher than the sovereign's. As with other Italian regions, Marche benefits from national state aid, such as transfers and support in case of unpredictable events such as last year's earthquake, but remains subject to making contributions to Italy's consolidation efforts to balance the national accounts, with repeated revenue curtailments. Modest Economy Recovery Located at the centre of Italy, Marche is a medium-to-large region and has an estimated population of 1.5 million inhabitants and a GDP of about EUR40bn. After a mild recovery in 2015, lower than the 0.8% Italian average, Fitch's expectations of muted regional GDP growth in 2016 may be affected by the recent earthquake impacting part of Marche's territory. The economy is driven by traditional industry activities (mainly furniture and mechanics), while textiles and shoes continue to suffer from declining exports. Falling unemployment (9.9% in 2015 versus 10.1% in 2014) and a better-than-average employment rate of 62% in 2015 (57% nationally) mitigate potential pressure on the regional tax base as a result of the 2016 earthquake. RATING SENSITIVITIES Marche's ratings would be downgraded if the sovereign rating is downgraded. A negative rating action may also result if operating performance deteriorates to levels such that Marche is unable to cover most of its debt servicing requirements. Conversely, given the sovereign cap, a revision of Italy's Outlook to Stable could lead to a similar rating action on Marche, provided the region continues to perform in line with Fitch's projections. Contact: Primary Analyst Gian Luca Poggi Director +39 02 879087 293 Fitch Italia S.p.A. Via Morigi 6 Milan 20123 Secondary Analyst Primary Analyst Federica Bardelli Associate Director +39 02 87 90 87 261 Committee Chairperson Guilhem Costes Senior Director +34 93 323 84 10 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. 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