Overview -- On July 30, we revised downwards our GDP growth forecast for the Republic of Italy, and the region of Campania has a track record of lower GDP growth than the sovereign. -- We are consequently lowering our long-term rating on Campania to 'BBB' from 'BBB+'. -- The negative outlook reflects our view of the risk that Campania's liquidity could deteriorate. Rating Action On Aug. 21, 2012, Standard & Poor's Ratings Services lowered its long-term issuer credit rating on the Italian Region of Campania to 'BBB' from 'BBB+'. The outlook is negative. Rationale The downgrade primarily reflects our view of the impact of Italy's deteriorating economy on Campania's individual credit profile. On July 30, 2012, we lowered our macroeconomic forecast on Italy for this year, and extended our forecast of negative GDP also to 2013 (see "The Curse Of The Three Ds: Triple Deleveraging Drags Europe Deeper Into Recession," published on July 30, 2012, on RatingsDirect on the Global Credit Portal). The region of Campania has a track record of more sluggish GDP growth than Italy. Following our ordinary surveillance review, we have lowered our economic score on Campania to highlight our view of limited growth prospects for the region. The economic score is one of eight factors we assess to determine the long-term rating on Campania. The rating on Campania is primarily constrained by our attribution of a score of '4' to its financial management, on a scale of '1' to '5' where '1' is the strongest score. We also view the region's budgetary performance and budgetary flexibility as "weak." The rating is supported by Italian central government's tight supervision of the region, and what we see as Campania's commitment to restructuring the health care sector. Both the central and regional governments have contributed to reducing health care deficits beyond our expectations in 2011. The rating on Campania is also supported by the region's moderate debt burden. Our '4' score for Campania's financial management is mainly based on our view of the region's long track record of what we view as substandard accounting, which in our opinion has hindered expenditure controls. This has weighed on Campania's budgetary performance and budgetary flexibility and impaired its liquidity by contributing to a substantial accumulation of payables. That means Campania has very high levels of unpaid supplier debt, which has led to unfavorable court rulings and substantial cash seizures on the regional treasury. That said, we note that financial managers elected in 2010 are improving accounting practices and information flows within the regional administration and strengthening financial control. However, we believe that Campania's substandard accounting is influenced by past practices, deeply ingrained in the region, and will take time to work out, despite current improvements. The central government's tight supervision of Campania's health care restructuring plan and the region's commitment to the plan are yielding good results, in our observations. Health care currently takes up most of Campania's budget but for the last two years the implementation of the plan has helped it outperform our expectations. In 2011, health care deficits, at -2% of regional operating revenues, shrank by two-thirds compared with 2009, when they stood at -7% of operating revenues. We expect the region to maintain health care deficits at -2% of operating revenues over the forecast horizon from 2012 to 2014, also because of continuing central government monitoring. We believe the recession in Italy is intensifying. In the case of Campania, lackluster revenue growth could hinder budgetary performance improvements because of inherited, still fragile, expenditure control mechanisms. We therefore forecast that the region's operating margins will likely continue to come under pressure and hover around -5% of operating revenues over 2012 to 2014. On a more positive note, we estimate that deficits after capital accounts should slightly trend down to 6%-7% on average during our forecast scenario for 2012 to 2014. We factor in falling investments roughly in line with Campania's investment plan. We also estimate that the region's debt burden will stabilize in absolute terms, remaining below 75% of consolidated revenues until 2014. This is a moderate debt burden compared with the median of issuers in the 'BBB' category. Liquidity We assess Campania's liquidity as "neutral" and its access to external liquidity as "satisfactory," as our criteria define these terms. Average available liquidity lines in 2011, which amounted to EUR590 million a month, together with cash holdings, cover 2012 debt service by almost 2x. Campania had not drawn on its liquidity line by July 31, 2012. We forecast under our base-case scenario that Campania will continue to draw on its liquidity line and we forecast that by year-end 2012 available credit lines together with cash holdings will cover 2013 debt service requirements by at least 1.2x. We understand that the past volatility in Campania's cash holdings, which prompted the region's use of cash advances, was due to central government delays in transferring health care-related revenues, and court judgments that blocked cash. The central government collects health care-related operating revenues, mainly value-added tax (VAT), the personal income tax (PIT) surcharge, the business tax, and in Campania's case, the equalization fund. It then transfers these proceeds to the region which, in turn, channels the money to health care units. In 2010 and 2011, the central government delayed some of these transfers, partly due to noncompliance with the health care restructuring plan. In response, the region drew on its liquidity lines to cover cash shortfalls at health care units. Campania's health care units have shown increasing payment delays to suppliers due to what we see as substandard accounting practices. These delays prompted an increasing number of lawsuits from 2009 to 2011, which led to court judgments seizing and/or blocking cash at certain health care units. That means cash provided by the region through its liquidity lines has not done much to ease the tight liquidity positions of its health care units. Campania's stock of supplier debt, however, stabilized at the end of 2011 for the first time. The amount of liquidity blocked by courts has also decreased. And we estimate that supplier debt should shrink by the end of 2012 because of rescheduled agreements with health care suppliers. Despite these positive movements in 2012, we continue to forecast a still large amount of payables at health care units, despite the decrease expected by the end of 2012. We also continue to factor in the risk that volatility in cash holdings at the regional level might continue, although to a lower extent than in the past, and we assume the region will continue to marginally draw on its liquidity lines for its daily operations. Outlook The negative outlook reflects our view of the risk that Campania's liquidity could deteriorate. We might lower our rating on Campania if we saw an increase in the risk that the central government could delay transfers to the region and exacerbate liquidity problems. In our view the risk of transfer delays could increase, although not necessarily, if the sovereign's credit profile deteriorated. We see no upgrade potential for the rating at this stage. Related Criteria And Research -- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010 Ratings List Downgraded To From Campania (Region of) Issuer Credit Rating BBB/Negative/-- BBB+/Negative/-- Senior Unsecured BBB BBB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.