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Rating Action:

Moody's changes the outlook on the Generalitat de Catalunya's Ba3 ratings to stable from negative; ratings affirmed

19 Oct 2018

Madrid, October 19, 2018 -- Moody's Investors Service has today changed the outlook on the Generalitat de Catalunya's (Catalunya, Generalitat de) ratings to stable from negative and affirmed its long-term issuer and senior unsecured ratings at Ba3. Moody's also affirmed the Senior Unsecured MTN rating at (P)Ba3, the short term rating at (P)NP and, commercial paper at NP. Finally, Moody's changed Catalunya's baseline credit assessment (BCA) to caa1 from caa2.

The outlook change to stable reflects: (i) the rating agency's view that the deterioration in the region's economy after the unilateral declaration of independence from Spain has been limited; (ii) that Catalunya benefits from Spain's economic growth, putting the region on the path towards fiscal consolidation, reducing its deficit levels and debt metrics.

RATINGS RATIONALE

RATIONALE FOR OUTLOOK CHANGE TO STABLE

The outlook change to stable from negative on Catalunya's ratings reflects Moody's view that a significant deterioration in the region's economy after the unilateral declaration of independence in October 2017 has been limited. While Moody's notes a slowdown in the region's domestic demand growth in the last quarter of 2017, its effects on the annual real gross domestic product (GDP) growth was limited, as the region grew by 3.3% vs. 3.1% at the national level in 2017. The industry sector, which accounts for 20% of the region's GDP (vs. 16% at the national level), remained seemingly intact, growing above the national level and further evidenced by a strong industrial production index. As a result, the rating agency notes that Catalunya continues to be the largest regional economy in Spain and contributes 19% of Spain's GDP.

Moody's notes that positive economic growth in Spain is helping the region's fiscal consolidation, improving gross operating performance and reducing deficit levels. In addition, although regional debt levels should continue to increase through 2020, the ratio of net direct and indirect debt to operating revenue should decrease, as Spain's strong GDP growth bolsters regional tax revenue at a faster pace than debt stock growth.

RATIONALE FOR AFFIRMATION OF Ba3 RATING

The affirmation of the Ba3 long-term issuer and debt ratings is the combination of an improvement in Catalunya's standalone credit profile, as reflected in the upgrade of its BCA to caa1 from caa2, and the high extraordinary support received from the central government.

The upgrade of the Generalitat de Catalunya's BCA mainly reflects a lower-than-expected impact from political tensions on the region's economy. However, the BCA also reflects the region's financial performance, which remains weak, despite improving in 2017. In 2017, Catalunya's financial performance resulted in a negative gross operating balance (-2% of operating revenue), high financing deficit (-6.4% of operating revenue) and very high debt burden, reflected by a net direct and indirect debt to operating revenue of 285% in 2017, compared with the average for Moody's-rated regions of 197%. Moody's believes that expenditures will continue to increase in the coming years, as the regional government's main focus is on the region's self-determination with no structural reforms planned for this term.

Moody's views positively the high support received from the central government to date mainly via the "Fondo de Liquidez Autonómico" (FLA). Moody's expects that this support will continue to be forthcoming. The region has received a total of €57 billion of liquidity support from the central government's different sources since 2012, which is equivalent to around 80% of Catalunya's outstanding direct debt. The rating agency expects that an additional €8 billion will be financed through the FLA in 2019. In addition, the central government recently allowed the Generalitat de Catalunya to convert €2.7 billion of its short-term debt into long-term debt, which can therefore be refinanced under the FLA, reducing the refinancing risk of its €4.7 billion of outstanding short-term debt.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's would consider upgrading Catalunya's rating if its fiscal and financial performance significantly improved. Additionally, a strengthening of support from the central government could also lead to an upgrade.

In contrast, downward pressure on the rating could materialise if Catalunya's policy changes reversed its fiscal consolidation or if the region's fiscal performance deteriorated. In addition, a downgrade of the sovereign rating, or any indication of weakening government support, would likely lead to a downgrade of Catalunya's rating.

The specific economic indicators, as required by EU regulation, are not available for this entity. 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$): 38,381 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -3.1% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1.8% (2017 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 17 October 2018, a rating committee was called to discuss the rating of the Catalunya, Generalitat de. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased.

The principal methodology used in these ratings was Regional and Local Governments published in January 2018. 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.

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
Client Service: 44 20 7772 5454

David Rubinoff
MD - Sub-Sovereigns
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.
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