(The following statement was released by the rating agency)
Sept 17 - Fitch Ratings has affirmed the Italian Region of Piemonte’s Long-term foreign and local currency ratings at ‘BBB+', Short-term rating at ‘F2’ and removed all ratings from Rating Watch Negative (RWN). The Outlook is Negative. The rating affects about EUR6bn of bonds and loans outstanding and future direct borrowing.
The RWN was maintained on June 2012 when the Region was downgraded to ‘BBB+’ from ‘A-’ following missed payments on swap transactions. The RWN was maintained upon risks that the unilateral annullation of the swap transactions could eventually trigger an acceleration of the bond repayment according to the terms of the bonds.
The removal of the RWN follows indication by the Region that banks/bondholders have not sought to enforce the cross default clause. Therefore risks of an acceleration of the repayment of the EUR1.856m bond, as well as loans outstanding, are deemed to have substantially receded.
The region’s decision to renege on financial commitments pending a final court ruling on whether or not the swap transactions are binding reflects a weaker debt service culture than had been incorporated into Piemonte’s rating until June 2012. As these reasons persist over time, Fitch may maintain at least a one notch discrepancy with Italy’s sovereign rating by the time Piemonte’s ratings are in the ‘BBB’ rating category.
Piemonte’s Negative Outlook mirrors that of the Republic of Italy and encapsulates risks of a declining budgetary performance and weak debt service coverage ratios. Italy’s efforts to achieve a balanced budget by 2013/4 and maintain it thereafter in order to gradually reduce the debt-to-GDP ratio has meant reiterated cuts in revenue allocations to regions, including Piemonte.
Fitch’s central scenario continues to envisage a thin operating surplus of about EUR200m, accounting for about 2% of the operating budget size, which is unlikely to fully cover debt servicing requirements, expected to account for about EUR300m over the 2012-2014 period.
Piemonte’s rating could be downgraded over the next 18-24 months if the Region fails to restore an operating surplus which allows for the full debt-servicing coverage or if Italy’s sovereign rating is downgraded.