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Fitch Affirms Autonomous Community of La Rioja at 'BBB'; Outlook Stable
December 9, 2016 / 7:10 PM / a year ago

Fitch Affirms Autonomous Community of La Rioja at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, December 09 (Fitch) Fitch Ratings has affirmed the Autonomous Community of La Rioja'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 ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB'. The affirmation reflects La Rioja's still rather weak fiscal performance in 2015, a high debt burden and financial support from the central government. The ratings also take into account the region's economic outperformance versus the national economy. The Stable Outlook incorporates Fitch's expectations that the region's fiscal performance will improve gradually while direct debt will remain high until 2017 at 146%-148% of current revenues. KEY RATING DRIVERS Improvement in Operating Performance Under Fitch's base case scenario, La Rioja's operating margin should improve to 3%-5% between 2016 and 2017, from 1% at end-2015. This is based on expected average operating revenue growth (3% yoy) from an improving national economy, and also due to large tax settlements from the funding system corresponding to previous years' revenue. Operating expenditure may grow by a slower 2%-2.5% on average between 2016 and 2017, after the region's management lifted cost-containment policies it had introduced in 2009-2014. Fitch acknowledges that the funding system for Spanish regional governments is likely to be reviewed over the medium term. However, Fitch still does not factor in its projections any change of the system. High Direct Debt Direct debt will remain high in 2016 between EUR1.4bn and EUR1.5bn, or 145%-147% of current revenues, although debt servicing-to-current revenue will fall to 35%-40% for 2016, from 48.2% in 2015. Pressure on debt servicing is high, with overall debt repayment for the next three years of EUR715.2m, or 50.5% of outstanding direct debt at end-2015. However, default risk on market debt is mitigated by the fact that 19% of the direct debt is contracted through the state support mechanism, at subsidised rates. Central Government Support At end-2015, state liquidity mechanisms represented around 19% of outstanding direct debt. This followed the central government's move to ratify its financial support on 23 December 2014, by introducing further measures to ease the debt burden of autonomous communities, including, in 2015, zero-interest loans. As a result, interest costs for La Rioja declined in 2015 to EUR26.6m (from EUR31.6m in 2014). Nevertheless, in 2016, La Rioja has returned to debt capital markets to finance its budgetary needs and debt redemptions. New Regional Government A coalition government in La Rioja was elected in May 2015 between the former centre-right wing party Partido Popular (PP) and the centre wing party Ciudadanos. This resulted in a new political agreement that prioritises social care. The new President is Jose Ignacio Ceniceros, who has expressed a strong intention to comply with fiscal targets. Regional Economy Recovering La Rioja shows a better-than-average economic profile, with a GDP per capita 9.5% above Spain's average and an employment rate of 50% in 2015, compared with the national average of 46%. La Rioja's economy grew 3.2% in 2015 to an estimated nominal EUR7.9bn. The labour market also improved in October 2016 as job creations increased 8% since December 2013, after 12.6% jobs were lost in the preceding five years. La Rioja has a higher share of elderly population than Spain (20% versus 18.4%), which translates into more pressure on social public services. RATING SENSITIVITIES A negative operating balance, possibly driven by a higher-than-expected operating expenditure growth, or a substantial deterioration of the debt servicing-to-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 (2015: 147%). 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 mechanisms. Contact: Primary Analyst Julia Carner Analyst +34 93 323 8401 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=1016244 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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