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Fitch Affirms Italian City of Naples at 'BBB-'/Negative
December 16, 2016 / 6:21 PM / a year ago

Fitch Affirms Italian City of Naples at 'BBB-'/Negative

(The following statement was released by the rating agency) MILAN/LONDON, December 16 (Fitch) Fitch Ratings has affirmed the Italian City of Naples' Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and Short-Term Foreign Currency IDR at 'F3'. The Outlook is Negative. The issue ratings on Naples' senior unsecured bond have also been affirmed at 'BBB-'. The affirmation reflects Fitch's expectation of stable operating performance on an accrual basis amid a weak local economy, and high direct risk. The Negative Outlook factors in the city's failure to improve tax and fee collection rates, leading to a diverging trend between operating performance on an accrual basis and operating performance on a cash flows basis. KEY RATING DRIVERS Weak Collection Rate In view of Naples' rigid budget Fitch expects the city to keep costs under control, while more reliable forecasts stemming from new accounting rules will help reduce the mismatch between accruals and cash flows, thus allowing the city to maintain a balanced budget. Nevertheless, tax and fees collection remains challenging, exacerbated by a still slow economic recovery. However, Fitch understands from the administration that it is committed to improving its so far weak collection rate (around 80% in 2014-2015), while the agency will monitor the city's cash flow dynamics and adherence to its recovery plan. The latter was revised after a EUR690m fund balance deficit emerged in 2015 following the implementation of new accounting rules. Stable Budgetary Performance Fitch expects stable operating margin, after adjusting for difficult-to-collect revenue, of about 9% in 2016, which should mostly cover the city's debt service requirements. Declining state transfers and low fiscal flexibility due to a weak tax base are likely to lead to a moderate 2% revenue CAGR in 2016-2018 while current spending growth will keep pace with revenue growth. Under Fitch's forecasts, the city's EUR900m capex in 2016-2018 will go towards transportation, extraordinary road maintenance and urban renovation. They will be mostly funded by non-debt resources such as transfers of about EUR600m, sales of real estate assets and new borrowing for almost EUR200m. Moderate Market Debt Fitch expects Naples' direct risk to stabilise at around EUR2.5bn in 2016-2018 (EUR2.6bn at end-2015), or about 210% of budget when EUR1.1bn subsidised loans from Cassa Depositi e Prestiti (CDP, BBB+/Negative, the national government financial arm) to pay down the city's commercial liabilities are included. CDP is the counterparty of 75% of Naples' direct risk and almost the entire stock of loans carries fixed interest rates, reflecting a prudent debt management approach. Market debt, however, remains moderately high at 120% of the city's revenue. Fitch continues to assume that the preferential payment mechanism will continue to guarantee timely debt service payments, as presently defined by national law. Weak Economic Fundamentals With nearly 1 million inhabitants, Naples is one of the biggest Italian cities and, although it is the most dynamic and industrialised city in southern Italy, Fitch views its socio-economic profile as weak relative to national levels. Naples' labour market is also underperforming the national economy with unemployment rate around 20% (10.9% nationally at end-3H16) and the employment rate at 38% (57.6% nationally at end-3H16). Naples' GDP is likely to see a mild recovery in 2016-2017, after several years of recession or stagnation, driven by tourism, industry and partly by commerce, while projects to revitalise the city's port would be key in supporting long-term local economic activity. A large shadow economy helps moderate the impact of the economic weakness. Supporting National Government Fitch considers inter-governmental relations as neutral to Naples' ratings. Despite Naples being exposed to the national government's spending cuts, the city benefits from the state support, such as equalisation transfers (EUR350m in 2016, or nearly 30% of operating revenue) to offset its weaker-than-national average fiscal capacity, and funding for large projects. Naples also benefits from a recovery plan that is monitored by the national audit body, Corte dei Conti, which aims to replenish the statutory fund balance deficit in 30 years. RATING SENSITIVITIES The ratings could be downgraded if debt and equivalents rise above 2.5x of operating revenue. A downgrade could also stem from a failure to improve tax and fee collection eventually leading to a negative operating margin on cash basis. Adverse changes to the preferential payment mechanism protecting financial lenders could lead to a downgrade, possibly by multiple notches. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 879087 261 Fitch Italia S.p.A. Via Morigi 6 Milan 20123 Secondary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 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=1016668 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. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. 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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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