Fitch Affirms City of Naples at 'BBB-'; Outlook Stable
KEY RATING DRIVERS
The affirmation reflects the stock of debt in line with Fitch's 2014-2016 projections amid a stable operating margin of 12% and the expectations of a downward trend for current payables.
Debt: To speed up the repayment of operating payables, Naples brought forward subsidised borrowing for about EUR200m in 2014, raising the stock of Fitch's calculated debt liabilities to EUR2.6bn, roughly 2x of operating revenues.
Fiscal Performance: According to preliminary figures, Naples posted an operating balance of EUR175 in 2014 on a cash flow basis, in line with Fitch's expectations of 12% in 2014-2016. The administration plans to offset about EUR20m of cuts in national subsidies in 2015 with an expanding tax base by fighting high tax evasion. The implementation of new investment projects in 2015-2016 remain matched with capital transfers of about EUR800m while the city continues to carry out capex already funded for roughly EUR1.5bn.
Economy: Naples' economy remains relatively weak with unemployment rate hovering above 20% yet shows signs of slight recovery from end-2014 driven by tourism and industry. Fitch expects it to grow by up to about 0.5% in 2015, but without a significant improvement in tax compliance, with municipal tax and fees collection rates eventually languishing behind national average.
Management: Fitch does not expect major changes in the city's policies, which continue to be focused on the execution of the recovery plan under the tutorship of the national audit body, Corte dei Conti, and control of costs at the core administration as well as those of the city's subsidiaries. Naples has overcome the fund balance deficit on Fitch's calculation basis, which considers subsidised borrowing of roughly EUR1.2bn in 2013-2014 as debt liabilities instead of long-term payables.
Institutional Framework: The framework remains supportive for Naples. The extension of the maturities on about EUR400m loans and reduction of the rates negotiated with the state lending arm for local governments, Cassa Depositi e Prestiti (BBB+/Stable), will help maintain debt servicing requirement close to 12%. However, the city keeps segregating liquidity to ensure timely debt service in light of still high commercial payables of roughly EUR1bn. Fitch believes preferential payments continue to fend off possible claims from unpaid creditors, which are subordinated to available liquidity.
Naples' ratings could be downgraded if debt and its equivalents (such as subsidised loans or re-scheduled payables), climb towards 2.5x of operating revenues. A downgrade could stem from failure to bolster tax and fees collection rates towards 95% and/or current payables failing to retract regardless of the reduction induced by subsidised borrowing as this could not be commensurate with an investment grade rating. Adverse changes to the preferential payment mechanism protecting financial lenders could lead to a downgrade, possibly by multiple notches.
An upgrade seems unlikely over the medium term. However, factors which may, individually or collectively, result in positive rating action include a fall in financial debt back towards 1x the budget size and a recovering economy that would support a stronger fiscal performance with an operating margin rising towards 20%, with subsequent quicker repayment of outstanding payables.