Fitch Affirms City of Barcelona at 'BBB+'; Outlook Stable
The affirmation reflects Barcelona's strong operating performance and liquidity in 2015 and moderate direct debt, following deleveraging since 2014. The affirmation also reflects the city's strong economy. The Stable Outlook factors in our expectation that Barcelona will continue to post strong operating performance and that direct debt will stabilise over the medium term.
KEY RATING DRIVERS
Barcelona is the administrative, political and economic center of the Autonomous Community of Catalonia (BB/Negative/B), hosting 21.4% of the region's population in 2015. The city has a diversified and wealthy economy and benefits from strong tourist activity, with as many as 76,121 hotel rooms in July 2016, having grown 13% since July 2012. Barcelona's seaport is a leader in Europe with the highest cruise passenger traffic in the Mediterranean and with significant containers traffic.
Its strong economy is demonstrated by a regional GDP per capita in 2015 that was 18.8% above the Spanish average and a higher-than-average employment rate of 51% (46% in Spain). In December 2015, local housing prices were 48% above that in Catalonia, having grown by 4% since December 2013.
Strong Operating Performance
Barcelona's strong operating performance is largely driven by large transfers from the central government (42% of operating revenue) and strong tax collection.
The city's 2016 draft budget was not approved, resulting in the 2015 budget being extended into 2016. Fitch expects Barcelona's operating margin will remain strong in 2016, in compliance with the city's deficit target in terms of national accounts, at 13%-15%, albeit down from 21.1% at end-2015. Once adjusted for a EUR61m one-off item in staff costs from a judgment court, the operating margin would be 15%-16%, which Fitch expects to continue up to 2018.
For 2016, the new local government will take advantage of its financial leeway to increase operating expenditure by between 3% and 4% yoy, largely on social spending. Fitch expects Barcelona's operating revenue to decline in 2016 by 2%-3%, due to lower resources within the funding system from the central government and a EUR43m current transfer in 2015 that will not be repeated. Fitch expects operating revenue growth to then moderate to 1%-2% on average in 2017-2018.
Change of Government
The agreement signed between Barcelona en Comu and socialist party PSC resulted in a more stable and reinforced government, as it gained representation in the city council's political composition. The mayor Ada Colau continues to have a strong commitment to comply with the budget deficit and debt targets and to maintain a current margin of 15%.
Moderate Direct Debt; Strong Liquidity
Direct debt remained moderate at EUR835.7m, or 32.2% of current revenue in 2015, down from EUR971.6m or 37.2% in 2014, following an early repayment of EUR138m debt. For 2016, Fitch expects direct debt will slightly increase close to 32%-34% of expected current revenue, but well below the 75% debt target.
Pressure on debt servicing is fairly moderate, particularly with a total EUR331.7m debt maturing over the next three years, representing about 40% of outstanding direct debt at end-2015. Nevertheless, this is mitigated by the city's strong access to capital markets and cash position of EUR631.2m at end-2015, which indicates a low 14% net overall risk relative to current revenue. Its strong cash position also means that no renewal of short-term credit lines was necessary in 2015, which we expect to continue in 2016.
Barcelona's IDRs are constrained by the sovereign IDRs (BBB+/Stable) and are sensitive to changes of the sovereign ratings. An upgrade of the sovereign IDRs would result in an upgrade of Barcelona's IDRs.
Although currently viewed by Fitch as highly unlikely, a sharp decline in the current margin below 5% (2015: 21.8%) and a sharp increase in direct debt would trigger a negative rating action on Barcelona's IDRs.
Fitch assumes national economic growth will translate into enhanced funding resources from the central government to local entities from 2017. Barcelona's IDRs could be placed on Rating Watch Negative or downgraded in the event of a unilateral declaration of Catalonia's independence, which would weaken Barcelona's financial metrics.