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Rating Action:

Moody's downgrades 4 Spanish regions; confirms ratings of Valencia and Castilla-La Mancha

17 May 2012

Madrid, May 17, 2012 -- Moody's Investors Service has today downgraded the ratings of the Spanish regions of Catalunya, Murcia, Andalucia and Extremadura due to their poor fiscal performance in 2011 and the low probability that the regional governments will be able to meet the 2012 deficit target set by the central government. At the same time, Moody's has today also confirmed the ratings of the regions of Castilla-La Mancha and Valencia, and of four government-related entities in Valencia, reflecting their non investment grade ratings and the significant liquidity support from the Spanish central government.

Further to these rating actions, all six affected regions carry negative outlooks in line with the negative outlook carried by the A3 sovereign bond rating of the Kingdom of Spain. Today's rating actions conclude the review for downgrade that Moody's initiated on 15 February 2012.

The ratings of the following four regions have been downgraded:

- Junta de Extremadura: long-term issuer rating downgraded by one notch to Baa1 from A3; outlook negative

- Junta de Andalucia: long-term issuer and debt ratings downgraded by two notches to Baa2 from A3; outlook negative

- Comunidad Autonoma de Murcia: long-term issuer and debt ratings downgraded by two notches to Ba1 from Baa2; outlook negative

- Catalunya: long-term issuer and debt ratings downgraded by one notch to Ba1 from Baa3; outlook negative; short-term rating downgraded to Not-Prime from Prime-3

The ratings of the following two regions and four government-related entities have been confirmed:

- Castilla-La Mancha: long-term issuer and debt ratings confirmed at Ba2; outlook negative

- Region of Valencia: debt ratings confirmed at Ba3; outlook negative; short-term rating unchanged at Not-Prime

- Instituto Valenciano de Finanzas: debt rating confirmed at Ba3, in line with Valencia's ratings; outlook negative.

- Notes of CACSA and Universities of Valencia (Universidad de Valencia, Universidad de Alicante, Universidad Jaume 1 de Castellón and Universidad Politécnica de Valencia) confirmed at Ba3, in line with Valencia's ratings; outlook negative.

- Notes of Feria Valencia: underlying rating confirmed at Ba3 with a negative outlook (A and B Certificates); the rating of Feria Valencia's notes remains at Aa3 on review for downgrade, in line with the financial guarantee provided by Assured Guarantee (Europe) Ltd.

RATIONALE FOR THE DOWNGRADES

Moody's decision to downgrade the ratings of the Spanish regions of Extremadura, Andalucia, Murcia and Catalunya was driven by the following factors:

1.) The poor fiscal outcomes in 2011, as evidenced by deficit-to-regional-GDP ratios of above 3% for these four regions, which considerably exceed the 2011 deficit target of 1.3% set by the government for Spanish regions.

2.) The significant deterioration in the four regions' debt metrics as a result of the refinancing of their commercial debt with financial debt. A special fund (Fondo para la Financiacion de los Pagos a Proveedores) has been set up by the government in order to refinance the commercial debt of regional and local governments. However, this refinancing of commercial debt will further increase the regions' 2012 direct debt stock: specifically, Moody's expects that net direct and indirect debt will reach at least 64% of operating revenue for Extremadura, 88% for Andalucia, 143% for Murcia and 225% for Catalunya (vs. 53%, 63%, 97% and 215% at year-end 2011, respectively).

3.) The considerable uncertainty surrounding these regions' capacity to reach the 2012 deficit target of 1.5% of deficit to regional GDP. While Moody's believes that the structural reforms in healthcare and education announced in April 2012 will help reduce the regional deficit over the medium term, the rating agency believes that some measures will be challenging to implement, and their effect on the 2012 budget outcomes will thus likely be limited. Consequently, these four regions will continue to rely on debt increases to cover their large financial imbalances.

In particular, the downgrades of Catalunya's and Murcia's ratings to non-investment grade reflect the regions' poor fiscal performances in 2011 and Moody's expectation that they are likely to miss the 2012 deficit target. Although both regions had forecast a reduction in health and education expenditure during 2011, these cuts were not realised to the extent they were budgeted. Coupled with lower state transfers, this led to large financing deficits of 37% and 29% of their operating revenue, respectively (against 30% and 28% in 2010). Looking ahead, Moody's expects that the refinancing of the regions' outstanding commercial debt (EUR1.9 billion for Catalunya and EUR1.2 billion for Murcia) will significantly increase their stock of debt in 2012.

Finally, while Moody's views both regions' liquidity position as weaker than most of their national peers' -- as evidenced by their minimal cash reserves throughout 2011 and the extensive use of their credit-line facilities -- Moody's considers that the recent measures announced by the government to support regions' liquidity largely offsets this risk. The central government provided EUR10 billion worth of liquidity support to the Spanish regions through the state-owned bank (Instituto de Credito Oficial, ICO) to help them cover debt redemptions that will become due in the first half of 2012. As only EUR3.8 billion have been used so far, Moody's believes that the ICO credit line is likely to be extended through the second half of the year, which would significantly ease refinancing pressures on regions.

RATIONALE FOR RATINGS CONFIRMATION

Moody's decision to confirm Castilla -- La Mancha's Ba2 and Valencia's Ba3 ratings reflects the following factors:

1.) The government has extended liquidity support via the ICO, which enabled Valencia and Castilla - La Mancha to refinance EUR2.2 billion and EUR469 million, respectively, since the beginning of the year.

2.) In exchange for this support, Valencia and Castilla -- La Mancha are subject to tight government control, which includes prior authorisation of any financial operation and a monitoring of their cash position.

Moody's notes that the refinancing of commercial debt will cause large debt increases for Valencia and Castilla -- La Mancha. According to Moody's estimates, their debt-to-operating-revenue ratio would represent approximately 234% and 167%, respectively, at year-end 2012 (against 204% and 123% in 2011). Although these regions' financial positions remain weak, immediate liquidity risks have been lessened leading the rating agency to confirm their ratings.

WHAT COULD MOVE THE RATINGS UP/DOWN

A stabilisation of the outlooks on the six affected regions would require the regional and local administrations to implement detailed plans to restore fiscal balances and reverse debt ratios. Changes to the institutional framework that would result in a more stable funding framework for the regions could also exert upward pressure on the ratings.

Any further deterioration of the operating environment in Spain that would put pressure on the sovereign rating would also have a negative impact on the ratings of Spanish sub-sovereigns. Also, any signal of weakening government support would be a credit-negative factor. Finally, a failure of any individual sub-sovereign to progress towards fiscal consolidation targets would add pressure to that specific rating.

METHODOLOGIES USED

The methodologies used in these ratings were Regional and Local Governments Outside the US published in May 2008, The Application of Joint-Default Analysis to Regional and Local Governments published in December 2008 and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

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In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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

Sebastien Hay
VP - Senior Credit Officer
Sub-Sovereign Group
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
Moody's downgrades 4 Spanish regions; confirms ratings of Valencia and Castilla-La Mancha

No Related Data.
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