January 13, 2017 / 7:14 PM / in a year

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

(The following statement was released by the rating agency) BARCELONA, January 13 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Madrid's (Madrid) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) 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 Madrid's still weak fiscal performance, high direct debt, but also a strong economy that is supportive of the ratings. The Stable Outlook reflects Fitch's expectations that the region's fiscal performance will gradually improve and that the regional economy will remain strong, despite an expected rise of direct debt to 180%-190% of current revenue by 2017 from 180% in 2015. KEY RATING DRIVERS Operating Performance Expected to Improve The regional government has rolled over the 2016 budget for 2017 and the 2017 regional draft budget approval will be given once the central government has communicated its final allocations for 2017. Fitch expects the region's operating performance to have improved in 2016 and to continue this trend in 2017, with an operating margin of 3%-4% (-1.1% at end-2015). This is based on expected average operating revenue growth of 4.2%, stemming from national economic recovery and a large revenue settlement from the funding system corresponding to previous years' revenue. Operating expenditure is likely to have grown by a slower 1%-2% in 2016, after one-off health spending of around EUR250m in 2015. Madrid's current weak fiscal performance is attributed to the current funding system to which the region is a net contributor. This results in its funding per capita being 10% below the average of the other 14 regions under the common regime. The funding system for Spanish regional governments is likely to be reviewed over the medium term but Fitch does not factor in its projections a change of the system. Strong Regional Economy Recovering Madrid has a strong economic profile, with a GDP per capita 36.7% above Spain's average in 2015. It is the main political, administrative and economic centre in Spain (BBB+/F2/Stable). Its strong economy is also illustrated by a higher-than-average employment rate of 53.6% in 3Q16 versus 48.1% nationally. Madrid's economy is recovering as GDP grew 3.9% yoy in 2015 to an estimated nominal EUR203bn. Madrid created a cumulative 10.4% more jobs between December 2013 and November 2016, after having shed 9.4% jobs between December 2008 and December 2013, reflecting the economic recovery underway in the region. Rising Direct Debt Madrid's direct debt grew significantly in 2015 to EUR26.9bn or 180.1% of current revenue, (EUR24.2bn or 170.6% in 2014) and Fitch estimates this to have grown further in 2016 to EUR28bn-EUR29bn, or 180%-185% of current revenues. Debt servicing-to-current revenue is expected to have slightly declined from 26% in 2015. Overall debt repayments for the next three years are EUR7.2bn, or 27% of outstanding direct debt at end-2015. However, this is mitigated by Madrid's strong access to external liquidity. Strong Access to External Liquidity Madrid has strong access to capital and commercial markets to fund its annual deficit, even during adverse periods. Consequently, it is one of the few Spanish regional governments rated by Fitch that had not applied to the Regional Liquidity Fund state support mechanism until 2014. The central government's introduction in 2015 of the Fondo de Facilidad Financiera zero interest rate loans for regional governments that complied with stability goals helped ease Madrid's commercial debt financing in 2016. Nevertheless, Madrid has funded a larger proportion of its annual deficit through capital market debt and bank loans bearing moderate interest rates averaging 1.54% and with a long amortisation period. In 2017, Madrid's debt redemption and budgetary needs will continue to be funded from capital markets and banks. Adherence to Fiscal Targets The President of the regional government formed following the May 2015 elections, Ms. Cristina Cifuentes, will continue with the fiscal policy with a strong intention to comply with fiscal targets. RATING SENSITIVITIES A negative operating balance in 2016 would automatically result in a negative rating action. Direct debt structurally exceeding 200% of current revenue could also trigger a negative rating action. The ratings could be upgraded if the regional government reports a consistently positive current balance and if direct debt to current revenue declines on a sustained basis. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to Spanish autonomous communities over the medium term, in particular, through liquidity mechanisms. Discussion on the regional financial system is ongoing in Spain, and changes are in prospect over the medium term. However, Fitch does not factor such changes into Madrid's IDRs. 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: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. Fitch has made an adjustment to the official accounts to make Madrid comparable internationally for analyses purposes: -Negative cash in 2014 and 2015 from cash, liquid deposits, sinking fund was re-classified to short-term direct debt Additional information is available on www.fitchratings.com 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=1017546 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. 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