Fitch Affirms Autonomous Community of Andalusia at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Andalusia's 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 'BBB-' ratings on Andalusia's outstanding senior unsecured bond issues have also been affirmed.
Fitch has also assigned Long-term local and foreign currency ratings of 'BBB-' and a Short-term foreign currency rating of 'F3' to Andalusia's EUR360m commercial paper (pagares) programme.
The affirmation reflects Fitch's unchanged rating floor of 'BBB-' being applied to Spanish autonomous communities. Fitch will monitor the debate regarding liquidity support from the central government to Spanish regions.
KEY RATING DRIVERS
The ratings are supported by Fitch's expectations of state support as captured by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving an autonomous community's liquidity and reducing the likelihood of default. These include the budgetary stability law (BSL) and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and access to the state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).
Central Government Support
Andalusia had received a total of EUR19.7bn through state liquidity mechanisms at end-2015 (approximately 65% of direct 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; the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers; and the FFF, aimed at helping regions to comply with the financial goals set by the central government. Debt contracted under these mechanisms is repaid evenly over 10 years.
In Fitch's view, Andalusia's access to state support will continue to ensure timely debt servicing, as the region faces significant redemptions over the next three years, which exceeded 30% of outstanding debt at end-2015. Under Fitch's base case scenario, Andalusia's funding needs of EUR3.3bn in 2016 will mostly rely on the FLA. Expected improvement in current revenues should slow total debt increase, easing the debt burden to below 145% of current revenue through to 2017, from 152% in 2015.
Andalusia had EUR1,280m of short-term debt at end-2015, representing roughly 4% of total debt at end-2015, which is to be mostly rolled over in 2016. This includes an outstanding EUR280m from the CP programme, covered by undrawn credit lines contracted by Andalusia at end-2015.
Weak Intrinsic Credit Metrics
Andalusia's negative current balances since 2011 and high debt burden mean that the region's standalone credit metrics are weaker than the ratings indicate. Preliminary results for 2015 showed Andalusia posting a 1.13% fiscal deficit, in breach of the 0.7% goal and slightly below 2014's 1.35%. Operating margin remained in negative territory at -2.5%, against -2.2% in 2014, due to lower-than-expected revenue transfers. However, deficit before debt at 6.5% was close to Fitch's estimate of 7%, as the region reduced capital expenditure to offset reducing revenues.
We expect Andalusia to report a positive operating balance in 2016, driven by a significant increase in operating revenues, due to a EUR959m positive settlement from 2014 and a EUR488m increase in regional funding allocation (equivalent to 7.3% of operating revenues in 2015 preliminary accounts).
Recovery of Regional Economy
Andalusia has a weaker economic profile than Spain, with a GDP per capita equivalent to 74% of the national average, albeit average by international standards. However, GDP grew 4.2% in 2015, outperforming Spain's 3.8%. Fitch expects the figure to be above 2% over 2016-2017, underpinning the region's budgetary performance. The regional government is implementing a number of programmes to address the informal economy and foster the labour market, which will be positive for revenues.
A removal of the 'BBB-' rating floor for Spanish autonomous communities will result in a downgrade of Andalusia's IDRs.
An improvement of budgetary performance, coupled with debt stabilisation, could bring Andalusia's intrinsic credit profile closer to the rating floor of 'BBB-'.