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TEXT-S&P cuts Italian Region Campania to 'BBB' from 'BBB+'
August 21, 2012 / 3:47 PM / 5 years ago

TEXT-S&P cuts Italian Region Campania to 'BBB' from 'BBB+'

Overview
     -- On July 30, we revised downwards our GDP growth forecast for the 
Republic of Italy, and the region of Campania has a track record of lower GDP 
growth than the sovereign.
     -- We are consequently lowering our long-term rating on Campania to 'BBB' 
from 'BBB+'. 
     -- The negative outlook reflects our view of the risk that Campania's 
liquidity could deteriorate.

Rating Action
On Aug. 21, 2012, Standard & Poor's Ratings Services lowered its long-term 
issuer credit rating on the Italian Region of Campania to 'BBB' from 'BBB+'. 
The outlook is negative. 

Rationale
The downgrade primarily reflects our view of the impact of Italy's 
deteriorating economy on Campania's individual credit profile.

On July 30, 2012, we lowered our macroeconomic forecast on Italy for this 
year, and extended our forecast of negative GDP also to 2013 (see "The Curse 
Of The Three Ds: Triple Deleveraging Drags Europe Deeper Into Recession," 
published on July 30, 2012, on RatingsDirect on the Global Credit Portal). The 
region of Campania has a track record of more sluggish GDP growth than Italy. 
Following our ordinary surveillance review, we have lowered our economic score 
on Campania to highlight our view of limited growth prospects for the region. 
The economic score is one of eight factors we assess to determine the 
long-term rating on Campania.

The rating on Campania is primarily constrained by our attribution of a score 
of '4' to its financial management, on a scale of '1' to '5' where '1' is the 
strongest score. We also view the region's budgetary performance and budgetary 
flexibility as "weak." 

The rating is supported by Italian central government's tight supervision of 
the region, and what we see as Campania's commitment to restructuring the 
health care sector. Both the central and regional governments have contributed 
to reducing health care deficits beyond our expectations in 2011. The rating 
on Campania is also supported by the region's moderate debt burden.

Our '4' score for Campania's financial management is mainly based on our view 
of the region's long track record of what we view as substandard accounting, 
which in our opinion has hindered expenditure controls. This has weighed on 
Campania's budgetary performance and budgetary flexibility and impaired its 
liquidity by contributing to a substantial accumulation of payables. That 
means Campania has very high levels of unpaid supplier debt, which has led to 
unfavorable court rulings and substantial cash seizures on the regional 
treasury. 
That said, we note that financial managers elected in 2010 are improving 
accounting practices and information flows within the regional administration 
and strengthening financial control. However, we believe that Campania's 
substandard accounting is influenced by past practices, deeply ingrained in 
the region, and will take time to work out, despite current improvements. 

The central government's tight supervision of Campania's health care 
restructuring plan and the region's commitment to the plan are yielding good 
results, in our observations. Health care currently takes up most of 
Campania's budget but for the last two years the implementation of the plan 
has helped it outperform our expectations. In 2011, health care deficits, at 
-2% of regional operating revenues, shrank by two-thirds compared with 2009, 
when they stood at -7% of operating revenues. We expect the region to maintain 
health care deficits at -2% of operating revenues over the forecast horizon 
from 2012 to 2014, also because of continuing central government monitoring.

We believe the recession in Italy is intensifying. In the case of Campania, 
lackluster revenue growth could hinder budgetary performance improvements 
because of inherited, still fragile, expenditure control mechanisms. We 
therefore forecast that the region's operating margins will likely continue to 
come under pressure and hover around -5% of operating revenues over 2012 to 
2014.

On a more positive note, we estimate that deficits after capital accounts 
should slightly trend down to 6%-7% on average during our forecast scenario 
for 2012 to 2014. We factor in falling investments roughly in line with 
Campania's investment plan. We also estimate that the region's debt burden 
will stabilize in absolute terms, remaining below 75% of consolidated revenues 
until 2014. This is a moderate debt burden compared with the median of issuers 
in the 'BBB' category.

Liquidity
We assess Campania's liquidity as "neutral" and its access to external 
liquidity as "satisfactory," as our criteria define these terms.

Average available liquidity lines in 2011, which amounted to EUR590 million a 
month, together with cash holdings, cover 2012 debt service by almost 2x. 
Campania had not drawn on its liquidity line by July 31, 2012. We forecast 
under our base-case scenario that Campania will continue to draw on its 
liquidity line and we forecast that by year-end 2012 available credit lines 
together with cash holdings will cover 2013 debt service requirements by at 
least 1.2x. 

We understand that the past volatility in Campania's cash holdings, which 
prompted the region's use of cash advances, was due to central government 
delays in transferring health care-related revenues, and court judgments that 
blocked cash. 

The central government collects health care-related operating revenues, mainly 
value-added tax (VAT), the personal income tax (PIT) surcharge, the business 
tax, and in Campania's case, the equalization fund. It then transfers these 
proceeds to the region which, in turn, channels the money to health care 
units. In 2010 and 2011, the central government delayed some of these 
transfers, partly due to noncompliance with the health care restructuring 
plan. In response, the region drew on its liquidity lines to cover cash 
shortfalls at health care units.

Campania's health care units have shown increasing payment delays to suppliers 
due to what we see as substandard accounting practices. These delays prompted 
an increasing number of lawsuits from 2009 to 2011, which led to court 
judgments seizing and/or blocking cash at certain health care units. That 
means cash provided by the region through its liquidity lines has not done 
much to ease the tight liquidity positions of its health care units.

Campania's stock of supplier debt, however, stabilized at the end of 2011 for 
the first time. The amount of liquidity blocked by courts has also decreased. 
And we estimate that supplier debt should shrink by the end of 2012 because of 
rescheduled agreements with health care suppliers.

Despite these positive movements in 2012, we continue to forecast a still 
large amount of payables at health care units, despite the decrease expected 
by the end of 2012. We also continue to factor in the risk that volatility in 
cash holdings at the regional level might continue, although to a lower extent 
than in the past, and we assume the region will continue to marginally draw on 
its liquidity lines for its daily operations. 

Outlook
The negative outlook reflects our view of the risk that Campania's liquidity 
could deteriorate.

We might lower our rating on Campania if we saw an increase in the risk that 
the central government could delay transfers to the region and exacerbate 
liquidity problems. In our view the risk of transfer delays could increase, 
although not necessarily, if the sovereign's credit profile deteriorated.

We see no upgrade potential for the rating at this stage.

Related Criteria And Research
     -- Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010

Ratings List
Downgraded
                                        To                 From
Campania (Region of)
 Issuer Credit Rating                   BBB/Negative/--    BBB+/Negative/--
 Senior Unsecured                       BBB                BBB+


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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