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Rating Action:

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

12 Dec 2013

Madrid, December 12, 2013 -- Moody's Investors Service has today changed the outlook on the ratings of all Spanish sub-sovereigns to stable from negative and has affirmed those ratings.

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

Today's outlook changes on Spanish sub-sovereigns were triggered by (1) Moody's change of the outlook on the Spanish Baa3 sovereign rating on 4 December 2013; 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-Baa3-government-bond-rating-to--PR_287655).

RATINGS RATIONALE

RATIONALE FOR THE OUTLOOK CHANGES

Moody's believes that the country's improving medium-term economic prospects --captured by the change in outlook to stable on Spain's Baa3 rating -- will gradually result in higher tax revenue and growing state transfers for regions, helping them rebalance their budgets. Moody's anticipates that despite the gradual improvement in the regions' fiscal positions, regional debt ratios will continue to increase until 2015, after which they will start decreasing.

The government's track record in providing sizeable liquidity support to the regional sector supports Moody's view that the government is able and willing to extend the existing liquidity mechanisms for as long as financial pressures persist in the regional sector (Please refer to the Special Comment published on 9 October 2013, (https://www.moodys.com/research/Spanish-Regions-Government-Liquidity-Critical-to-Managing-Persistent-Deficits-and--PBC_157719).

Moody's also notes that the Spanish Treasury's market funding at significantly lower interest rates has direct positive repercussions on the financial conditions of government loans to the regional sector. The government offers these loans through its liquidity support mechanisms for regions, the Fondo de Liquidez Autonomico (FLA) and the Fondo para la Financiacion de los Pagos a Proveedores (FFPP).

RATIONALE FOR THE RATING AFFIRMATIONS

--THE BASQUE COUNTRY AND THE PROVINCE OF BIZKAIA

Moody's decision to affirm the Baa2 ratings of the Basque Country and the province of Bizkaia reflects these entities' unique and constitutionally protected tax regimes, which currently allow them to retain enough credit strength to maintain their ratings one notch above that of the sovereign. In addition, the Basque Country and the province of Bizkaia have comfortable liquidity positions. Unlike Bizkaia, which released a budget surplus in 2012, the Basque Country had a deficit of 9% of its operating revenue last year. However, Moody's notes that this deficit reflected the region's capital expenditure, given its almost balanced operating position.

--CITY OF BARCELONA

The Baa3 rating reflects the local administration'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 surpluses (24% of operating revenue on average for 2007-12) and moderate debt levels (62% of operating revenue in 2012). The rating also reflects Barcelona's good liquidity position, with abundant cash on hand and limited debt obligations.

Barcelona is rated on par with the Spanish government bond rating of Baa3 stable. 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, MADRID AND EXTREMADURA

Moody's notes that the regions of Castilla y León, Galicia and Madrid, rated on par with the Sovereign's Baa3 stable rating, have reported stronger financial performances than other Moody's-rated Spanish regions throughout the crisis. Nevertheless, their income stream largely relies on state transfers and shared taxes with the sovereign, thus capping their ratings at the sovereign level.

While Extremadura's rating of Ba1 captures the liquidity pressures that the region faces, these are not extreme and Extremadura did not need to request central government support through the FLA. The region's fiscal position improved significantly in 2012 and Moody's expects that these improvements in deficit levels will continue in 2013. The rating affirmation also reflects the region's low debt levels compared with its national peers at 68% of its operating revenue in 2012 (compared with 156% for the rated regions on average).

--REGIONS OF ANDALUCIA, CASTILLA LA MANCHA, CATALUNYA, MURCIA AND VALENCIA

The rating action on these five Spanish regions primarily reflects their need for liquidity support, which they receive from the central government. FLA support ensures that they will be able to cover their financial obligations.

However, although the FLA greatly reduces the short-term risk of a region's liquidity-driven default, it does not address fundamental economic and fiscal challenges. These regions' fiscal positions will remain fragile in the next few years. In response, Moody's believes that the government will extend the existing liquidity mechanisms for as long as financial pressures persist (EUR23 billion will be made available via the FLA in 2014).

Moody's assesses the standalone creditworthiness (Baseline Credit Assessment or BCA) of regions having requested FLA funding as being weak, evidenced by their high debt ratios and their negative operating balances. The very low BCAs also reflect Moody's view that these regions will need to seek further external support in the next year, because of their persistent fiscal challenges. 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 2012, which partially offsets their very weak standalone creditworthiness.

WHAT COULD CHANGE THE RATINGS UP/DOWN

An upgrade of Spain's 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 performance were to improve and if they were able to regain good and stable market access.

In contrast, a downgrade of Spain's sovereign rating, any indication of weakening government support or a deterioration in fiscal performance would likely lead to a downgrade of sub-sovereign entities.

RATINGS AFFECTED

- Basque Country: long-term issuer and debt ratings affirmed at Baa2; outlook changed to stable;

- Diputacion Foral de Bizkaia: long-term issuer rating affirmed at Baa2; outlook changed to stable;

- Comunidad Autonoma de Madrid: long-term issuer rating affirmed at Baa3; outlook changed to stable;

- Junta de Castilla y Leon: long-term issuer and debt ratings affirmed at Baa3; outlook changed to stable;

- Comunidad Autonoma de Galicia: long-term issuer and debt ratings affirmed at Baa3; outlook changed to stable;

- City of Barcelona: long-term issuer rating affirmed at Baa3; outlook changed to stable.

- Junta de Extremadura: long-term issuer rating affirmed at Ba1; outlook changed to stable;

- Junta de Andalucia: long-term issuer and debt ratings affirmed at Ba2; outlook changed to stable;

- Comunidad Autonoma de Murcia: long-term issuer and debt ratings affirmed at Ba3; outlook changed to stable;

- Junta de Comunidades de Castilla-La Mancha: long-term issuer and debt ratings affirmed at Ba3; outlook changed to stable;

- Generalitat de Catalunya: long-term issuer and debt ratings affirmed at Ba3; outlook changed to stable; short-term rating affirmed at Not-Prime;

- Generalitat de Valencia: debt rating affirmed at B1; outlook changed to stable; short-term rating affirmed at Not-Prime;

- Instituto Valenciano de Finanzas: debt rating affirmed at B1, outlook changed to stable, in line with Valencia's ratings;

- Notes of CACSA and Universities of Valencia (Universidad de Valencia, Universidad de Alicante, Universidad Jaume 1 de Castellón and Universidad Politécnica de Valencia) affirmed at B1, outlook changed to stable;

- Notes of Feria Valencia: underlying rating affirmed at B1, outlook changed to stable (A and B Certificates).

Specific economic indicators as required by EU regulation are not applicable for these entities.

On 04 December 2013, a rating committee was called to discuss the ratings of Barcelona, City of; Basque Country, The; Bizkaia, Diputacion Foral de; Madrid, Comunidad Autonoma de; Castilla y Leon, Junta de; Galicia, Comunidad Autonoma de; Extremadura, Junta de; Andalucia, Junta de; Murcia, Comunidad Autonoma de; Castilla-La Mancha, Junta de Comunidades de; Catalunya, Generalitat de; Valencia, Generalitat de; Instituto Valenciano de Finanzas; CACSA; Universities of Valencia; and FERIA VALENCIA. The main points raised during the discussion were: The systemic risk in which the issuers operate has materially decreased.

The principal methodology used in these ratings was Regional and Local Governments published in January 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's methodology for rating a security insured by a financial guarantor considers the higher of (i) the guarantor's rating, and (ii) the underlying rating of the security.

The weighting of all rating factors is described in the methodology used in this 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

Sebastien Hay
VP - Senior Credit Officer
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

Moody's changes outlook on ratings of all Spanish sub-sovereigns to stable from negative; ratings affirmed
No Related Data.
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