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Fitch Affirms Autonomous Community of Cantabria at 'BBB'; Outlook Stable
December 2, 2016 / 7:06 PM / a year ago

Fitch Affirms Autonomous Community of Cantabria at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, December 02 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Cantabria's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F2.' The affirmation reflects Cantabria's still rather weak fiscal performance in 2015, a moderately high debt burden as well as expected financial support from the central government. The Stable Outlook incorporates Fitch's expectations that the region's fiscal performance will improve gradually while direct debt will rise to 136% of current revenues in 2017. KEY RATING DRIVERS Improvement in Operating Performance Under Fitch's base case scenario Cantabria's operating margin should improve to 3%-5% between 2016 and 2018, from 2.7% at end-2015. The expected improvements are based on projected operating revenue growth (3% yoy), driven by a growing national economy and also due to the 2014 and 2015 revenue settlements from the funding system that Cantabria will receive from the central government. Operating expenditure is likely to grow on average 2.5% over 2016-2018, after the autonomous community lifted cost-containment policies introduced in 2010-2014. Fitch acknowledges that the funding system for Spanish regional governments is likely to be reviewed over the medium term. However, Fitch does not factor in its projections any funding system change. Rising Direct Debt Cantabria's long-term debt redemptions are estimated at EUR250m in 2016 and the regional government has agreed to formalise a total EUR260m from the Regional Liquidity Fund (FLA) to cover debt maturities. Under Fitch's base case scenario, direct debt is expected to increase to over EUR2.5bn-EUR2.7bn between 2016 and 2017 or 130%-136% of current revenues (EUR2.3bn in 2015 or 124.6% of current revenue). Pressure on debt servicing is high, with overall debt repayments for the next three years totaling EUR944m, or 40.5% of outstanding direct debt at end-2015. However, default risk on market debt is mitigated by 63.2% of Cantabria's direct debt being contracted through the state support mechanism, at subsidised interest rates. Central Government Support The central government ratified its financial support on 23 December 2014, introducing further measures to ease the debt burden of autonomous communities, including zero interest loans in 2015. As a result, interest costs for Cantabria declined in 2015 to EUR54.4m (EUR80.5m in 2014). In 1Q16 and 2Q16, support from the FLA was delayed due to political uncertainty on the central government, leading Cantabria to directly service its debt. However, disbursements from the FLA in 3Q16 were made on time. New Regional Government A coalition government in Cantabria was elected in May 2015 between the regionalist wing party Partido Regionalista de Cantabria and the socialist wing party Partido Socialista de Cantabria, replacing the previous government dominated by the centre-right wing party Partido Popular. This resulted in a fragmented political composition, with new political orientations prioritising social programmes and long-term employment, particularly in manufacturing. Regional Economy Recovering Cantabria has a regional population of around 585,200. Its economy grew 2.6% in 2015 to an estimated nominal GDP of EUR12.1bn. Job creations increased 4.1% over two years to December 2015, and rose 5% in October 2016, after a loss of 10.2% between December 2009 and December 2013. Cantabria's employment rate is lower than the national average, in part due to its ageing population. In 2015, 20.3% of the regional population was over 65 years old (up 14% since 2002). Cantabria is therefore facing growing pressure from social spending, due to an increasing population, including the elderly. RATING SENSITIVITIES A negative operating balance combined with direct debt exceeding 150% of current revenue could trigger a negative rating action. The ratings could be upgraded if the regional government reported a positive current balance and reduced direct debt to around 110% of current revenue. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to the Spanish autonomous communities over the medium term. Contact: Primary Analyst Julia Carner Analyst +34 93 323 8401 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: 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=1015798 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. 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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. 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