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Fitch Affirms Autonomous Community of Castile La Mancha at 'BBB-'; Outlook Stable
January 13, 2017 / 7:09 PM / a year ago

Fitch Affirms Autonomous Community of Castile La Mancha 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 Castile-La Mancha's (CLM) 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 'F3'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB-'. The affirmation reflects the unchanged 'BBB-' Support Rating Floor being applied to Spanish autonomous communities, including CLM. This supports the 'BBB-' rating, which is stronger than the region's intrinsic credit profile. Fitch will monitor the ongoing debate regarding liquidity support from the central government to Spanish regions. KEY RATING DRIVERS Central Government Support The Support Rating Floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; access to state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF), and the budgetary stability law (BSL), which enforces fiscal discipline on local and regional governments (LRGs). The region held around EUR9.8bn debt from state liquidity mechanisms at end-2016, or approximately 70% of its total debt, illustrating strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years. In Fitch's view, CLM's access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, which as of end-2016 exceeded 25% of outstanding debt. Fitch expects a normal application of the state mechanisms in 2017, after the delays during 1H16 caused by the implementation of reinforced monitoring and fiscal discipline from the Ministry of Finance and Civil Service (MinHap) over Spanish regions. The last instalment of the 2016 state mechanism programme made in December distributed more than EUR4bn among the Spanish regions. Under Fitch's base case scenario, CLM's funding needs of EUR1.8bn in 2017 will rely on the FLA, increasing the weight of state mechanism in the region's total debt. However, CLM is willing to diversify their funding sources and to tentatively tap markets, all within the prudential policy limits in place. Expected improvement in fiscal performance will slow down debt increase, and higher expected operating revenues may have resulted in a slight decline of the debt-to-current revenue ratio in 2016, from 273% in 2015. Current Balance Still Negative Negative current balances since 2008 and a high debt burden mean that the standalone credit metrics of CLM are weaker than its ratings indicate. Fitch expects an improvement of budgetary performance in 2016, due to an additional EUR260m inflow stemming from higher financial system allocations and a positive settlement from 2014, as well as a lower debt burden. Tax reforms leading to a potential annual collection increase of EUR40m are also expected, to a lesser extent, to have contributed to the improvement in fiscal performance. Despite an expected personnel cost increase of close to 5%, CLM will post a smaller negative current margin of around 10% in 2016, versus 13.6% in 2015 according to Fitch's base case scenario. Overall, Fitch's base case scenario forecasts a 2016 fiscal deficit at 0.7%-1%, in breach of the 0.7% deficit target. Slight Fiscal Improvement Ahead The region's government has drafted a budget for 2017, subject to the passing of the national budget of the state and thus confirming financial system allocations. Moreover, as the Socialist Party is governing in minority, it needs support from other parties represented in the regional parliament to pass the 2017 budget. The 2016's budget was rolled over in December 2016 to cover the interim period. Fitch expects CLM to continue improving its budgetary performance in 2017, although the current balance is likely to remain negative. Regional Economy in Recovery CLM has a weaker economic profile than Spain, with a GDP per capita equivalent to 78% of the national average in 2015. Fitch expects nominal GDP to have grown around 3% in 2016, slightly below the national rate, and for this trend to continue. The labour market has also improved as unemployment decreased to 22.7% in 3Q16 (Spain 18.9%), from 24.7% in 3Q15. Exports saw a record 7.5% growth y-o-y as of end-October 2016, although the region still has a trade deficit. RATING SENSITIVITIES As CLM's IDRs are supported by the 'BBB-' Support Rating Floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are withdrawn or if the central government's ability and willingness to continue providing extraordinary support to the regions deteriorates. Discussion on the regional financial system is ongoing in Spain, and changes are in prospect over the medium term. Nevertheless, Fitch believes the revenue of CLM is unlikely to decrease as a result. Contact: Primary Analyst Patricio Novales Analyst +34 93 323 84 17 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 93 323 84 10 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Pilar Perez, Barcelona, Tel: +34 93 323 8414, 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=1017545 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. 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