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Rating Action:

Moody's affirms the ratings of Castilla-La Mancha, Murcia and Valencia and upgrades Catalunya

12 Mar 2021

Madrid, March 12, 2021 -- Moody's Public Sector Europe (Moody's) has today affirmed the ratings of the Junta de Comunidades de Castilla-La Mancha and the Comunidad Autónoma de Murcia at Ba1 with a stable outlook. Moody's has also affirmed the Ba1 rating of the Generalitat de Valencia and has changed the outlook to negative from stable. Finally, Moody's has upgraded the rating of the Generalitat de Catalunya to Ba2 from Ba3 and changed the outlook to stable from positive.

The outlook change to negative from stable on the Generalitat de Valencia's rating reflects increasing risks of further debt growth in the medium to long-term, which given the region's already high debt levels, would put pressure on its Ba1 rating. The affirmation of Castilla-La Mancha and Murcia's ratings reflects Moody's view that the expected debt levels in the medium to long-term will continue to be adequately captured by their current ratings.

Catalunya's rating upgrade to Ba2 from Ba3 reflects Moody's view that the region's expected fiscal performance and debt levels in the coming years will be consistent with Ba2 rated peers. While the pandemic will lead to a deterioration in the region's debt ratio in the near-term, Moody's expects Catalunya to resume its deleveraging, likely from 2023 onward, supported by its wealthy economy and sophisticated governance.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL442287 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATIONS OF REGIONS OF CASTILLA-LA MANCHA AND MURCIA WITH STABLE OUTLOOK

While these two regions' debt to revenue ratios will deteriorate in the next two years, additional government transfers, EU funds and gradual economic recovery will mitigate the fiscal impact of the pandemic on their finances, thus limiting their debt accumulation. Net direct and indirect debt-to-revenue ratios will likely grow to approximately 225% for Castilla-La Mancha and around 250% for Murcia by 2022 before decreasing slowly as GDP growth will resume and taxes gradually recover. Moody's expects that their debt levels will remain manageable, and in line with Ba1 rated peers. In addition, these two regions' continued access to cheap funding through government liquidity facilities will maintain debt costs at affordable levels.

The affirmation of the Ba1 ratings on Junta de Comunidades de Castilla-La Mancha and the Comunidad Autonoma de Murcia reflects the combination of the regions' standalone credit profiles, as reflected in their Baseline Credit Assessments (BCAs) of b1, and Moody's assumption of a high likelihood of extraordinary support from the government of Spain (Baa1 stable).

The stable outlook on both regions reflects our view that their financial performance will remain consistent with Ba1 rated peers.

RATIONALE FOR OUTLOOK CHANGE TO NEGATIVE AND AFFIRMATION OF THE GENERALITAT DE VALENCIA'S RATING

While Valencia's fiscal improvement in 2020 mostly reflects additional government transfers to cover some of the costs and revenue loss caused by the pandemic, the decision to change the outlook to negative from stable on Valencia's rating reflects Moody's expectation that the region's debt-to-revenue ratio is likely to deteriorate more in the medium to long term compared to its Ba1 rated peers, from a level that is already very high. Moody's expects the region's net direct and indirect debt-to-operating revenue ratio to increase to approximately 370% by 2022, compared to 320% in 2020 and around 170% for the sector as a whole. Given the region's track record of persistent operating deficits in the last decade, Moody's views Valencia as being less likely to successfully tackle fiscal challenges and to reverse its growing debt trajectory, especially when government support measures related to the pandemic will be withdrawn over time. Moody's considers the pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety, increasing risks on the region of Valencia's credit profile.

The affirmation of the Generalitat de Valencia's Ba1 rating is based on a combination of the region's standalone credit profile, as reflected in its Baseline Credit Assessment (BCA) of b3, and Moody's assumption of a high likelihood of extraordinary support from the central government.

The rating affirmation is mainly based on the strong support that the region is currently receiving from the central government through the FLA, which ensures that the region can meet its financial obligations, and Moody's expectation that the region will continue to receive additional transfers to mitigate the impact of the pandemic on its finances in 2021.

Moody's has also affirmed the underlying ratings of FERIA VALENCIA and Universities of Valencia at Ba1 and has changed the outlooks to negative from stable, in line with the Generalitat de Valencia's rating.

RATIONALE FOR THE RATING UPGRADE OF GENERALITAT DE CATALUNYA WITH A STABLE OUTLOOK

The Generalitat de Catalunya's rating upgrade to Ba2 from Ba3 reflects the improvement in the region's financial position in recent years, as evidenced by a debt-to-revenue ratio estimated at 234% in 2020, against 268% in 2019 and almost 300% in 2016. The region entered the pandemic after a period of important fiscal consolidation and Moody's believes it is better positioned to absorb current and future fiscal pressures. Moody's estimates that its debt-to-revenue ratio will likely reach a pre-pandemic level in 2022, at approximately 270%. Catalunya's operating and financing profiles compare well with other Spanish regions that are rated higher, however the rating factors in some political risks. Although these risks have receded over the last couple of years, political tensions between the central government and Catalunya will likely persist, and will continue to complicate public policy-making in the region. That said, Moody's notes that these tensions have not affected Catalunya's access to government liquidity facilities, and that the region's strong administration and sophisticated governance constitute a factor of stability, supporting the delivery of nearly balanced operating results (as evidenced by a gross operating balance-to-operating revenue of -2.4% in 2020).

The stable outlook reflects the following balance of upside and downside risks: given its wealthy and diversified economy, which is expected to remain fundamentally strong, the region should recoup some of the revenue losses as the economy gradually recovers after the coronavirus. Risks on the downside include persistent political tensions.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

-- JUNTA DE COMUNIDADES DE CASTILLA-LA MANCHA

Environmental considerations are not material to Castilla-La Mancha's credit profile.

Social risks are material to Castilla-La Mancha's credit profile. The coronavirus outbreak will affect the region's credit profile in the form of negative economic growth and higher expenses. Spanish regions are responsible for healthcare, which typically represents around 40% of their expenses. Other social aspects include the ageing population, which will also affect social and healthcare expenditure. In addition, unemployment remains relevant for this region. Unemployment levels are likely to remain high, given the economic recession expected in Spain.

In terms of governance, the region's implementation of budgetary control plans on a multiyear basis is indicative of positive management actions. The region also provides transparent and timely financial reports.

-- COMUNIDAD AUTONOMA DE MURCIA

Environmental considerations are not material to Murcia's credit profile.

Social risks are material to Murcia's credit profile. The coronavirus outbreak will affect the region's credit profile through negative economic growth and higher expenses. Spanish regions are responsible for healthcare, which typically represents around 40% of their expenses. Other social aspects include the ageing population, which will also affect social and healthcare expenditure.

In terms of governance, the region's implementation of budgetary control plans is indicative of positive management actions. The region also provides transparent and timely financial reports.

-- GENERALITAT DE VALENCIA

Environmental considerations are not material to Valencia's credit profile.

Social risks are material to Valencia's credit profile. The coronavirus outbreak will affect the region's credit profile, through negative economic growth and higher expenses. Spanish regions are responsible for healthcare, which typically represents around 40% of their expenses. Other social aspects include the ageing population, which will also affect social and healthcare expenditure.

In terms of governance, Valencia has previously demonstrated weaknesses in its financial planning, illustrated by its high operating and financing deficit levels. While the region has implemented budgetary control plans in recent years and its transparent in its financial reporting, Moody's believes the region's governance is still weak.

-- GENERALITAT DE CATALUNYA

Environmental considerations are not material to Catalunya's credit profile.

Social risks are material to Catalunya's credit profile. Moody's considers the coronavirus outbreak to be a social risk that will significantly affect the region's financial position, through negative economic growth and higher expenses; Spanish regions are responsible for healthcare, which typically represents around 40% of expenses. Other social aspects include an ageing population, which will also lead to increasing social and healthcare expenditure over the long term. However, given the region's dynamic economy, population growth and large tax base, expenditure pressures will likely be more manageable for Catalunya compared to other Spanish regions.

In terms of governance, Catalunya has previously demonstrated weaknesses in its financial planning, illustrated by its high operating and financing deficit levels. However, in recent years, the region's implementation of budgetary control plans is indicative of positive management actions. The region also provides transparent and timely financial reports.

The specific economic indicators, as required by EU regulation, are not available for these entities. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Spain, Government of

GDP per capita (PPP basis, US$): 43,154 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.8% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -2.9% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.1% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: a2

Default history: No default events (on bonds or loans) have been recorded since 1983.

SUMMARY OF MINUTES FROM RATING COMMITTEE

On 09 March 2021, a rating committee was called to discuss the rating of the Castilla-La Mancha, Junta de Comunidades de; Catalunya, Generalitat de; Murcia, Comunidad Autonoma de; Valencia, Generalitat de. The main points for the Generalitat de Valencia raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The main points for the Generalitat de Catalunya raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially increased. The main points for the Junta de Comunidades de Castilla-La Mancha and the Comunidad Autonoma de Murcia raised during the discussion were: The issuers' fiscal or financial strength, including their debt profiles, have not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure would develop on the ratings of Castilla-La Mancha, Murcia and Catalunya if their fiscal and financial performance were to improve, reflected in positive and growing gross operating balances, financing surpluses and a significant reduction in their debt burdens sustained over time.

A downgrade of Spain's sovereign rating leading to indications of weakening government support for the regions, or a deterioration in their fiscal performance, would likely lead to a downgrade of Castilla-La Mancha, Murcia and Catalunya's ratings. In addition, downward pressure on Catalunya's rating could occur if political tensions were to increase.

Given the negative outlook on Valencia's rating, an upgrade is unlikely over the next 12 to 18 months. Downward pressure on the rating could occur if operating performance and debt ratios were to deteriorate more than expected. In addition, a weakening ability of the government of Spain to support the region would also put downward pressure on the rating.

Any action taken on the Generalitat de Valencia's rating would have implications for the FERIA VALENCIA and Universities of Valencia's underlying ratings.

The principal methodology used in rating Castilla-La Mancha, Junta de Comunidades de, Catalunya, Generalitat de, Murcia, Comunidad Autonoma de, and Valencia, Generalitat de was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. The principal methodology used in rating FERIA VALENCIA, and Universities of Valencia was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1068154. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL442287 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marisol Blazquez
AVP-Analyst
Sub-Sovereign Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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