OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Valencia's (Valencia) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3.' The ratings on the senior unsecured outstanding bond issues have also been affirmed at 'BBB-' and 'F3'.

KEY RATING DRIVERS
Valencia's ratings are based on Fitch's expectation of support from the Spanish government and are supported by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the budgetary stability law and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and the access to state support mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

In Fitch's view, access to the FLA will continue to ensure timely debt servicing for Valencia. As of end-2014, the region had received a total of EUR20.3bn (61.5% of total direct debt) from state support funds, an illustration of strong support from the central government. This included the FLA, which was established in 2012, and the State Fund (FFPP). On 26 December 2014 the Ministry of Finance and Public Administration introduced the Royal Decree Law 17/2014, to enhance the financial state support to the Spanish regions in place since 2012, by introducing a new instrument - FFF - for regions compliant with the stability goals (see "Fitch: State Support for Spanish Regions Reinforced and Extended", dated 13 April 2015 on www.fitchratings.com). For Valencia, this resulted in roughly EUR600m interest expense savings for 2015 on funds contracted under the FLA and FFPP.

Valencia's standalone credit metrics are weaker than its rating would indicate due to its structural negative current balances and recurring overall budget deficits before debt repayment.

Fitch expects Valencia's budgetary performance to remain weak with a negative operating margin in the 13%-16% range in 2016, compared with an estimated negative 14.2% at end-2014. Operating expenditure is likely to grow marginally by 2%-3% in 2015, after declining since 2009 (-12% in 2013) due to a series of cost-containment policies. Transfers from the general administration to Valencia's public sector entities have been reduced by a significant 37% since 2009. An improvement in the national economy is likely to translate in a tax collection increase, although the complexity of the funding system means that Valencia's operating revenue should remain moderate. Its funding per capita was 14% below the average for the 15 regions under common regime in 2012, according to Fitch estimates.

Valencia's estimated current balance was negative in 2014 for the sixth consecutive year and Fitch does not expect this to reverse in the near-to medium-term. In 2014, the current balance was negative at EUR2.6bn, worse than the negative EUR1.9bn at end-2013, due to a 4.5% fall in total allocations from the central government and a 6% growth in operating expenditure from the payment of healthcare spending from previous years.

Fitch estimates direct debt to increase to over EUR36bn-EUR37.5bn, or 330%-340% of current revenue between 2015 and 2016, from EUR33bn in 2014. This indicates a high debt servicing-to-current revenue ratio of 56%-63% for this period.

Net overall risk was high at 352.2% of current revenue in 2014, reflecting the large debt of the autonomous community. The regional administration is currently restructuring the sector, reducing its transfers to these entities. There has been a sharp increase in direct debt since 2009 (of EUR23.8bn), as a consequence of widening deficits and the assumption of debt from some public entities, which has left the region exposed to significant refinancing risk (39% for the next three years).

Valencia's socio-economic profile is weaker than the national average, with a GDP per capita 12% below the national level and an unemployment rate of 25.8% in 2014, above the national average of 24.4%. However, in 4Q14 the labour market showed a positive reversal, as total registered workers rose by 4% against a 2% for Spain.

RATING SENSITIVITIES
Fitch will review the rating floor if state support measures are cancelled or if there is a reduction of the central government's ability and willingness to continue providing support to the regions. If the floor is removed, Valencia's rating is likely to be downgraded by more than two notches, unless it is able to report a structural positive current balance.