OREANDA-NEWS. Fitch Ratings has Affirmed Instituto Valenciano de Finanzas's Long-Term Foreign and Local Currency Issuer Default Ratings at 'BBB-' and its 'F3' Short-Term Foreign Currency Issuer Default Issuer Default Rating. The Outlooks for the long-term ratings are Stable.

The ratings were affirmed as there was no change in the statutory guarantee from the regional government of Valencia, whose ratings were affirmed 30 October 2015.

KEY RATING DRIVERS
Instituto Valenciano de Finanzas's (IVF) IDRs are equalised with those of the Autonomous Community of Valencia (BBB-/F3/Stable). Under Law 5/2013, all of IVF's financial obligations are explicitly, unconditionally and irrevocably guaranteed by the Autonomous Community of Valencia. Of all of Valencia's public sector entities, IVF is the only one that benefits from such an explicit guarantee.

IVF was created as the regional government's vehicle for carrying out its financial policy and channelling public credit. It promotes the economic and social development of the region. It is also responsible for the management of Valencia's debt as well as that of many of public sector entities that belong to the regional government.

Managing loans to the private sector, mainly SMEs, this year again became IVF's remit after a two-year gap in having that responsibility. Total lending narrowed in 2014 to EUR1bn and continues to be highly concentrated to the public sector (78%).

IVF reports directly to the Department of Finance and Economic Model of Valencia, whose president is also president of the agency. The department controls IVF's strategy. Six out of IVF's eight board of directors are appointed by the Autonomous Community of Valencia.

Valencia's annual budget law sets a limit on the debt of IVF (EUR1.2bn for 2015) and also establishes a limit on the amount of debt guaranteed by IVF (EUR900m for 2015).

RATING SENSITIVITIES
IVF's ratings could be downgraded if the Autonomous Community of Valencia were downgraded, or if statutory guarantees weaken. IVF's Stable Outlook mirrors that of the regional government. Conversely, a positive action on the rating of Valencia would automatically be reflected on IVF's rating.

Valencia's long-term ratings incorporate extraordinary support from the central government and are therefore higher than the region's credit fundamentals would indicate. Fitch introduced in March 2013 a rating floor for all Spanish autonomous communities, which currently is 'BBB-'.

Fitch's rationale for assigning a rating floor is based on a number of supporting factors that we believe would improve liquidity and reduce the likelihood of default by a region. These include the possibility of the central government intervening to narrow deficits, the absolute priority of debt servicing by law under Article 135 of the Spanish Constitution and the existence of the Regional Liquidity Fund (FLA). In July and December 2014, the Ministry of Finance and Public Administration introduced measures making borrowing conditions cheaper for autonomous communities that subscribed to the FLA. It also again widened the reimbursement period of negative tax settlements related to 2008 and 2009 from 10 to 20 years.

Valencia's credit fundamentals are weak in view of its poor budgetary performance, which we expect to continue at least through the end of this year, structural deficits, and its liquidity situation. The FLA should off-set these to some degree. Fitch will review the floor and will consider removing it if there is doubt as to the ability and the willingness by the central government to continue to provide extraordinary support to the regional governments.