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Fitch Affirms Metropolitan City of Milan at 'BBB+'; Negative Outlook
March 3, 2017 / 5:12 PM / 9 months ago

Fitch Affirms Metropolitan City of Milan at 'BBB+'; Negative Outlook

(The following statement was released by the rating agency) MILAN/BARCELONA, March 03 (Fitch) Fitch Ratings has affirmed the Metropolitan City of Milan's (MCM) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+' and Short-Term Foreign Currency IDR at 'F2'. The Outlooks are Negative. MCM's outstanding senior unsecured debt ratings have also been affirmed at 'BBB+'. The affirmation reflects MCM's wealthy economy, and our expectation that the city will extend its resilient through-the-cycle operating performance with spending control and debt stock reduction. The ratings also take into consideration the continued pressure on operating revenue stemming from national fiscal adjustment. KEY RATING DRIVERS Fiscal Performance MCM's prospects for tax revenue growth are stagnant as the expected decline from the insurance premium surcharge will largely offset vehicle registration tax revenue supported by a strengthened automobile market. Fitch expects the operating performance in 2016-2018 to be around 10%, on the assumption of a favourable calibration by the central government of net transfers and on the back of cost efficiencies from headcount reduction facilitated by the reallocation of certain responsibilities to the Region of Lombardy. Institutional Framework Metropolitan cities were established in 2014 under a law that reshaped their competencies and scope in a coordinated effort with regions. The resulting expense framework provided some downsizing benefits in terms of staff. However, this was more than offset by growing transfers to the central government to consolidate the national budget. Subsequent relief granted to provinces and metropolitan cities indicates that the funding scheme may still be evolving, including the final allocation of total transfers to the central government, of EUR3 billion annually from 2017. Management MCM actively monitors budget performance across the city's budget cycle and have cut expenditure in the face of revenue declines. In particular, the city has cut back staffing to align ongoing revenue with expenditure to achieve structural balance. Capex, typically for extraordinary maintenance of roads and school facilities, has been downsized over time and should average EUR50 million to EUR60 million in the medium term. It will likely continue to be largely self-funded through surplus, given MCM's limited appetite for new debt, and also through the rationalisation of the city's real estate portfolio. Debt and Liquidity Debt continues to be on an amortising trend, with a total stock at EUR606 million at end-2016, down from EUR629 million in the prior year. If the trend is maintained, MCM's debt should be well below EUR600 million by 2018. The cost of debt service will benefit from lower interest rates renegotiated under the loans with CDP, the government-owned lending arm, with an annual saving of about EUR6 million. MCM does not expect to raise further debt in 2017 provided that its mid-term capex policy continues to be funded with its own resources. In addition to the possible use of the treasury lines and the sale of the EUR30 million redeemable insurance, Fitch expects the MCM to maintain a healthy cash buffer against unexpected liquidity shortfalls. Economy MCM is an affluent residential and industrial area with a fully developed tax base, which proved stable and resilient during the last recession. Its better-than-national average GDP fundamentals should allow the local economy to maintain its wealthy indicators (GDP per capita around 50% above the EU29 average). We forecast the city's unemployment and employment rates in 2016 to have further improved from 8% (12% at national level) and 67.5% (55.5% at national level), respectively. RATING SENSITIVITIES An upgrade would be contingent on a similar action on the sovereign ratings, and provided that MCM continues to perform in line with Fitch's expectations. A sustained decline in the operating margin to the extent it is insufficient to largely cover annual debt-servicing requirements, or unexpected growth of debt towards 200% of revenue could prompt a downgrade. A sovereign downgrade could also result in a similar action on MCM. Contact: Primary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 Fitch Italia SpA Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Federica Bardelli Associate Director +39 02 879087 293 Committee Chairperson Guilhem Costes Senior Director +34 93 323 84 10 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=1020025 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. 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. 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 © 2016 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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