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Rating Action:

Moody's changes outlook on ratings of 14 Spanish sub-sovereigns to stable from positive; ratings affirmed

23 Feb 2016

NOTE: On November 30, 2016, the press release was corrected as follows: In the RATINGS RATIONALE section, the paragraph regarding Moody's methodology for rating a security insured by a financial guarantor was removed, and the second to last paragraph was changed to the following: “The principal methodology used for CACSA, Feria Valencia, Instituto Valenciano de Finanzas and Universities of Valencia’s ratings was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.” Revised release follows.

Madrid, February 23, 2016 -- Moody's Investors Service has today changed the outlook on the ratings of 14 Spanish sub-sovereigns to stable from positive. The outlooks on the regions of Junta de Andalucia (positive) and Generalitat de Catalunya (negative) remain unchanged. At the same time, Moody's affirmed the ratings of all Spanish sub-sovereigns.

Today's outlook changes on the Spanish sub-sovereigns were triggered by (1) the weakening of Spain's credit profile as captured by the outlook change on the Baa2 Spanish sovereign rating to stable from positive on 19 February 2016; and (2) the strong correlation between sub-sovereign and sovereign credit risk, reflected in macroeconomic linkages, institutional factors and financial market conditions.

For full details, please refer to the sovereign press release:

https://www.moodys.com/research/Moodys-changes-outlook-on-Spains-Baa2-rating-to-stable-from--PR_344070.

A detailed list of the affected issuers and ratings is provided at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE OUTLOOK CHANGES

Moody's believes that the weakening of the sovereign's creditworthiness --captured by the change in outlook to stable from positive on Spain's Baa2 rating -- is reflected at the regional level given the strong correlation between sub-sovereign and sovereign credit risk.

Moody's notes the strong reliance of the regions on the Spanish government, given the regions' extensive use of the central government's liquidity mechanisms: the Fondo de Liquidez Autonomico (FLA), established in 2012 for regions that breach deficit targets set by the central government; and the Fondo de Facilidad Financiera (FFF), established in 2015 for regions that comply with deficit targets. In 2015, 15 out of 17 Spanish regions (i.e. all regions with the exception of the Basque Country and Navarra) utilised these liquidity mechanisms.

Moody's also notes that there is some uncertainty around the regions' fiscal consolidation path for 2016, given the fragmented political composition at the national level, which could result in the relaxation of deficit reductions for the following years.

RATIONALE FOR THE RATING AFFIRMATIONS WITH OUTLOOK CHANGES

ENTITIES RATED ABOVE THE SOVEREIGN LEVEL

-- THE BASQUE COUNTRY AND THE PROVINCE OF BIZKAIA

Moody's decision to affirm the Baa1 ratings of the Basque Country and the province of Bizkaia reflects these entities' unique and constitutionally protected tax regimes. Moody's believes that while the Basque entities are likely to retain greater credit strength than the sovereign given their unique tax regime, they are integrated within the wider Spanish economy and are exposed to similar economic and financial pressures as the sovereign, which do not justify more than a one-notch differential. In addition, the Basque Country and the province of Bizkaia have comfortable liquidity positions. Unlike Bizkaia, which has recorded financing surpluses since 2011, the Basque Country is expected to have a financing deficit of close to 6% of its operating revenue in 2015. However, Moody's notes that this deficit reflected the region's capital expenditure, given its positive gross operating balance.

ENTITIES RATED AT THE SOVEREIGN LEVEL

--CITY OF BARCELONA

The Baa2 rating reflects the city's good budgetary management and solid financial fundamentals in recent years, which have ensured a high self-financing capacity and, as a result, a limited debt burden. This is mainly reflected in high gross operating balances (20% of operating revenue on average for 2010-14) and moderate debt levels (41% of operating revenue in 2014). The rating also reflects Barcelona's good liquidity position, with abundant cash on hand and limited debt obligations.

While Moody's acknowledges Barcelona's robust financials, the city does not have sufficient financial flexibility to justify a rating above that of the sovereign. The central government retains control of Spanish municipalities via legislation, the level of transfers, and the management of pay-rise packages for civil servants.

-- REGIONS OF CASTILLA Y LEON, GALICIA AND MADRID

Moody's notes that the regions of Castilla y Leon, Galicia and Madrid, rated on par with the Sovereign's Baa2 stable rating, have reported stronger financial performances than other Moody's-rated Spanish regions throughout the financial crisis; these regions' deficits are under control and their debt burdens, although increasing, are still manageable and consistent with this rating level. Nevertheless, their income stream largely relies on state transfers and shared taxes with the sovereign, thus capping their ratings at the sovereign level.

ENTITIES RATED BELOW THE SOVEREIGN LEVEL

--REGIONS CASTILLA LA MANCHA, EXTREMADURA, MURCIA AND VALENCIA

The rating action on these four Spanish regions primarily reflects their reliance on central government liquidity support through the FLA, which they are currently receiving.

However, although the FLA greatly reduces the short-term risk of a region's liquidity-driven default covering their financial obligations, it does not address fundamental economic and fiscal challenges. These regions' fiscal positions will remain fragile in the next few years, evidenced by their high financing deficits and growing debt levels. While regions of Castilla-La Mancha, Murcia and Valencia will retain very high debt ratios, Extremadura's debt levels will remain at low levels. According to Moody's estimations, the region's net direct and indirect debt to operating revenue ratio will be close to 100% of operating revenue at year-end 2015 (compared with 215% on average for Moody's rated regions).

Moody's believes that these regions will continue to receive liquidity support from the central government through the FLA for as long as financial pressures persist. At the same time, their ratings incorporate Moody's assessment of a heightened likelihood of government support, as corroborated by the central government's track record of support since the FLA was created in 2012, which partially offsets their weak standalone creditworthiness.

RATIONALE FOR RATING AFFIRMATION WITH OUTLOOK UNCHANGED

-- REGION OF ANDALUCIA

Andalucia's long-term issuer and debt ratings are affirmed at Ba1, with the outlook remaining positive.

The region's fiscal position has improved significantly since 2012 and Moody's expects that these improvements in deficit levels will have continued in 2015. The rating affirmation also reflects the region's moderate debt levels at around 130% of operating revenue estimated for 2015 (compared with 215% for the rated regions on average).

While other market options are becoming increasingly available to the region, Moody's believes that it will continue to use FLA funding in 2016, given its lower cost.

-- REGION OF CATALUNYA

The Generalitat de Catalunya's long-term issuer and debt ratings are affirmed at Ba2/NP, with the outlook remaining negative.

On 15 January 2016, Moody's changed the outlook on the rating of the Generalitat de Catalunya to negative from stable and affirmed its rating at Ba2/NP. The rationale to change the outlook to negative was mainly based on: (i) the increased risk that the region's fiscal consolidation efforts will halt, (ii) the increasing political tensions between Catalunya and the central government that could negatively affect the investment climate in the region; and (iii) a slight risk that, should political tensions escalate further, the government's liquidity support to the region could be affected.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The strengthening of Spain's credit profile, as reflected by an upgrade of the sovereign rating, would result in upward pressure on Spanish sub-sovereign ratings in general, and particularly on those ratings currently on par or above that of the sovereign. In addition, upward pressure would develop on sub-sovereigns currently rated below the sovereign, if their fiscal and financial performance were to improve.

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 sub-sovereign entities.

Given Andalucia's positive outlook, an upgrade would be possible if the region's 2015 financial results improve. In contrast, a stabilisation of the rating's outlook could occur if 2015 financial results lead to a reversal in its deficit reduction trajectory.

Given the negative outlook in Catalunya's rating, an upgrade in this region's rating is unlikely. Significant improvements in its own fiscal and financial performance could lead to the stabilisation of the rating's outlook. In contrast, downward pressure on the rating could occur if Catalunya's policy changes reverse the fiscal consolidation. In addition, a downgrade of the sovereign rating, or any indication of weakening government support, would likely lead to a downgrade in Catalunya's rating.

RATINGS AFFECTED

- Basque Country: long-term issuer and Senior Unsecured ratings affirmed at Baa1; outlook changed to Stable from Positive.

- Diputacion Foral de Bizkaia: long-term issuer rating affirmed at Baa1; outlook changed to Stable from Positive.

- Comunidad Autonoma de Madrid: long-term issuer rating affirmed at Baa2; outlook changed to Stable from Positive.

- Junta de Castilla y Leon: long-term issuer and Senior Unsecured ratings affirmed at Baa2; outlook changed to Stable from Positive.

- Comunidad Autonoma de Galicia: long-term issuer and Senior Unsecured ratings affirmed at Baa2; outlook changed to Stable from Positive.

- City of Barcelona: long-term issuer rating affirmed at Baa2; outlook changed to Stable from Positive.

- Junta de Extremadura: long-term issuer rating affirmed at Baa3; outlook changed to Stable from Positive.

- Junta de Andalucia: long-term issuer and Senior Unsecured ratings affirmed at Ba1, Senior Unsecured MTN affirmed at (P)Ba1; outlook remains Positive.

- Comunidad Autonoma de Murcia: long-term issuer and Senior Unsecured ratings affirmed at Ba2; outlook changed to Stable from Positive.

- Junta de Comunidades de Castilla-La Mancha: long-term issuer and Senior Unsecured ratings affirmed at Ba2; outlook changed to Stable from Positive.

- Generalitat de Catalunya: long-term issuer and Senior Unsecured ratings affirmed at Ba2, Senior Unsecured MTN affirmed at (P)Ba2, Commercial Paper affirmed at Not-Prime and Other Short Term affirmed at (P)Not-Prime; outlook remains Negative.

- Generalitat de Valencia: Senior Unsecured rating affirmed at Ba2, Commercial Paper affirmed at Not-Prime; outlook changed to Stable from Positive.

- Instituto Valenciano de Finanzas: BACKED Senior Unsecured Bank Credit Facility affirmed at Ba2, outlook changed to Stable from Positive, in line with Valencia's ratings;

- CACSA: Underlying Senior Secured affirmed at Ba2, BACKED Senior Secured affirmed at Ba2. Outlook changed to Stable from Positive.

- Universities of Valencia (Universidad de Valencia, Universidad de Alicante, Universidad Jaume 1 de Castellón and Universidad Politécnica de Valencia): Underlying Senior Secured affirmed at Ba2, BACKED Senior Secured affirmed at Ba2. Outlook changed to Stable from Positive.

- Notes of Feria Valencia: Underlying Senior Secured affirmed at Ba2, BACKED Senior Secured affirmed at A2, in line with Assured Guaranty (Europe) Ltd's rating.(A and B Certificates). Outlook changed Stable from Positive.

The sovereign action required the publication of these credit rating actions on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

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$): 33,835 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.4% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -1% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -5.9% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1% (2014 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: High level of economic resilience

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

On 18 February 2016, a rating committee was called to discuss the rating of the Andalucia, Junta de; Barcelona, City of; Basque Country (The); Bizkaia, Diputacion Foral de; CACSA; Castilla y Leon, Junta de; Castilla-La Mancha, Junta de Comunidades de; Catalunya, Generalitat de; Valencia, Generalitat de; Universities of Valencia; Extremadura, Junta de; Galicia, Comunidad Autonoma de; FERIA VALENCIA; Murcia, Comunidad Autonoma de; Madrid, Comunidad Autonoma de; Instituto Valenciano de Finanzas. The main points raised during the discussion were: The systemic risk in which the issuer operates has materially increased.

The principal methodology used in rating Junta de Andalucia, City of Barcelona, Basque Country, Diputacion Foral de Bizkaia, Junta de Castilla y Leon, Junta de Comunidades de Castilla-La Mancha, Generalitat de Catalunya, Junta de Extremadura, Comunidad Autonoma de Galicia, Comunidad Autonoma de Madrid, Comunidad Autonoma de Murcia, Generalitat de Valencia was Regional and Local Governments published in January 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The principal methodology used for CACSA, Feria Valencia, Instituto Valenciano de Finanzas and Universities of Valencia’s ratings was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis CACSA, FERIA VALENCIA, Instituto Valenciano de Finanzas, Universities of Valencia, Generalitat de Valencia or their agents are considered to be participating entities. These rated entities or their agents generally provide Moody's with information for their ratings process.

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

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
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
SUBSCRIBERS: 44 20 7772 5454

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
© 2019 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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