OREANDA-NEWS. Fitch Ratings has affirmed the Italian City of Turin's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and its Short-term foreign currency IDR at 'F3'. The Outlook is Stable.

The rating action affects Turin's senior unsecured debt, including a bond of nominal EUR355m at issue (XS0373247104), as well as future senior unsecured borrowings.

The affirmation reflects Fitch's expectations that the city will maintain sound operating performance in the medium term, mainly due to its tight cost control amid rigid revenue. Fitch also expects the stock of debt to remain around 2.6x operating revenue in the medium term.

KEY RATING DRIVERS

Debt: In line with our projections, Turin's stock of debt accounted for EUR3.4bn at end-2014, or about 260% of operating revenue, as calculated by Fitch, which included cumulated EUR450m borrowings from Cassa Depositi e Prestiti (CDP: BBB+/Stable) in 2013-2014 to pay down commercial liabilities. The debt is netted of about EUR100m loans subsidised by the national government and about EUR76m short-term debt to overcome delayed taxes inflows. Fitch does not expect the stock of debt to grow significantly in the medium term, so that new borrowings would eventually match principal repayment with a debt-to-current balance of around 40 years in 2015-2016.

Fiscal Performance: According to preliminary, unadjusted figures, Turin posted an operating margin close to 20% in 2014, somewhat higher than Fitch's expectations of 15% in 2014-2016, which continue to factor-in expected curtailments in transfers from the national government. A purported reform of municipal revenue from 2016, by merging the property and PIT surcharge into a new tax, could provide tax-raising leeway. However, Turin's budget remains rigid, as tax hikes may be difficult to implement given a sluggish local economy and relatively weak tax and fee collection rates close to 90% (operating receivables on average at EUR1bn in 2010-2014).
Economy: Despite a stagnating local economy in 2014, Fitch forecasts GDP will grow about 0.5% in 2015, on the back of strengthening industrial production fuelled by export growth (4.4% in 2014). However, with the unemployment rate remaining around 13% Fitch believes it could be challenging to improve tax collection rates and therefore operating cash flow generation.

Management: We believe Turin has modest provisions for doubtful receivables, in light of only a small official fund balance surplus of EUR25m, or 1.5% of operating revenues, earmarked to cover difficult-to-collect taxes and fees. In view of Turin's rigid budget, Fitch expects the city to maintain its tight grip on spending, which fell by 3% in 2011 - 2014.

Institutional Framework: Fitch considers inter-governmental relations as neutral for Turin. The city remains exposed to the national policy of cutting down deficit and debt, while upcoming local taxes will raise the financial autonomy of cities, such as Turin, making them less dependent on national subsidies. In the meantime timely payment of debt service remains somewhat reliant on preferential payments allowed by Italian legislation given Turin's tight liquidity

RATING SENSITIVITIES

Turin's ratings could be downgraded if the operating margin weakens towards 10%, and if overall long- term debt, including advances to pay commercial liabilities, continues to climb above EUR3.5bn.

Turin's ratings could be upgraded if the city manages to reduce its financial and commercial debt stock on a sustained basis, with the debt-to current balance ratio trending towards 25 years.