Fitch Revises Metropolitan City of Rome Outlook to Negative; Affirms at 'BBB+'
OREANDA-NEWS. Fitch Ratings has revised Metropolitan City of Rome's (Rome) Outlooks to Negative from Stable, while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+'. The agency has also affirmed Rome's Short-Term Foreign Currency IDR at 'F2' and senior unsecured bonds at 'BBB+'.
The Outlook revision reflects our expectation that Rome's operating performance will be hit by sluggish car market revenues and additional transfers to the State's consolidation efforts, leading to a weaker operating margin. The ratings also take into account a high, albeit declining debt, solid liquidity buffer, as well as a wealthy economy.
KEY RATING DRIVERS
The Outlook revision reflects the following rating drivers and their relative weights:
Operating Performance: Rome's adjusted operating margin before accounting rule changes was 4% in 2015, below Fitch's expectation of over 5% (and an average 8% through 2018). Rome is likely to struggle to maintain a positive operating balance as revenue recovery is held back by a sluggish auto sector (generating two-thirds of revenue) while tax leeway on the sector is limited by rates already being close to their allowed maximum. At the same time operating expenditure will be under pressure from growing transfers to the state budget of between EUR50m and EUR75m a year for 2016-2017.
Institutional Framework: Rome's performance in 2015 reflected a still evolving institutional framework for Italian metropolitan cities. Upcoming administrative elections are limiting the metropolitan city's administration to mainly maintenance services in water, road, school infrastructure and waste management. However, cuts in transfers by the central government to consolidate the national budget are making it increasingly challenging for the metropolitan city to deploy and maintain the level of services.
Debt and Liquidity: Fitch's central scenario forecasts EUR50m new borrowing over the medium term to finance mainly non-deferrable extraordinary maintenance on schools and roads, which have already been downsized to a yearly EUR60m (half of the 2012-2014 average). However, debt is expected to continue declining to EUR620m by 2017, or approximately 110%-120% of the budget (from almost EUR900m in 2010), while keeping the exposure to fixed interest rates at about 90%.
Rome's sound debt sustainability is supported by suspended debt repayments in 2015 (to Unicredit and CDP) as allowed by law while the city renegotiates the terms. The suspension helped Rome more than halve its interest payment to EUR11m and principal repayment to EUR27m (almost EUR40m in 2014).
Rome's liquidity position remained strong at EUR120m at 2015 (EUR100m at 2014) or 2x the normalised annual debt service requirement. Fitch expects liquidity to remain stable in the medium term, as attempts to recover at least part (25%) of the receivables (about EUR450m in mid-2015) from the Region of Lazio (BBB/Stable) are offset by new unpaid receivables.
Economy: Rome generates a GDP of approximately EUR150bn for a population of about 4.5 million. A large public sector has sustained employment (61.5% in 2015; Italy: 56.6%) supported Rome's tax revenue and helped maintain unemployment at 10.7%, below the national average of 12%. We expect the economy will maintain its wealthy indicators (GDP per capita about 30% above the EU28 average), backed by growing tourism and services, as well as rising exports in sectors such as chemical and mechanical.