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I AGREE
17 Dec 2010
Madrid, December 17, 2010 -- Moody's Investors Service has today downgraded the issuer and debt
ratings of the Basque Country as well as the issuer ratings of the Diputación
Foral de Guipuzcoa and Bizkaia by one notch to Aa1 from Aaa. The
outlooks are all negative.
RATINGS RATIONALE
"The rating actions taken today reflect the decline in the three
Basque entities' financial performance over the past three years,
which heightened in 2010 with a sustained deterioration in operating results
and a subsequent rapid recourse to debt," says Sebastien Hay,
a Vice President and Senior Credit Officer in Moody's sub-sovereign
team. In this context, Moody's believes that the expected
financial performance of the Basque entities in the coming years -
whose operating results and debt metrics are unlikely to return to pre-crisis
levels - is no longer compatible with their Aaa-rated international
peers. The new Aa1 rating for the Basque Region and its provinces
encapsulates this expected deterioration in their debt trajectory,
which is likely to reach 72% of total consolidated operating revenue
by year-end 2011 (excluding the Province of Alava, which
is not rated by Moody's).
According to Moody's, the negative outlooks assigned to the
Basque region and provinces are based on the recent review for possible
downgrade of the Spanish sovereign, which signals sluggish GDP growth
prospects for the country as a whole, and which is likely to continue
to affect the Basque tax base in the medium-term. The outlook
also takes into account that the borrowing needs for 2011 remain manageable
for the Basque region and modest for the provinces, but that the
persistance of currently difficult market conditions might lead to higher
debt service, possibly affecting the Basque entities' operating
results.
A return to a stable outlook would require additional tax revenue which
would support better-than-forecast debt trajectory in future.
In this regard, Moody's notes that the Basque entities currently
grant generous tax exemptions -- a policy which, if scaled
back, could yield substantial additional tax proceeds, if
necessary. A stabilised outlook would also require better overall
financial results than those currently envisaged by Basque administrations.
Below is a detailed list of rating changes that Moody's has implemented
today and the accompanying specific rationales:
BASQUE COUNTRY
Moody's has downgraded the Basque country's long-term
issuer and debt ratings to Aa1 from Aaa, with a negative rating
outlook. The downgrade was prompted by the rapid deterioration
in the region's budgetary performance in recent years and Moody's
expectation that this trend will continue over the medium term.
Moody's notes the rapid increase in the Basque Country's traditionally
low net direct and indirect debt stock in recent years to 45% of
operating revenue at year-end 2009. The rating agency expects
that this will rise above 60% in 2010 in order to cover the forecast
deficit of around 20% of its operating revenue, according
to 2010 estimated results. "Looking further ahead,
the Basque country's preliminary budget for 2011 forecasts a budget
deficit of approximately EUR1 billion and a continued high financing deficit
of 11.5% of operating revenue for the year, which
will lead the region to increase its net direct and indirect debt levels
to almost 70% of its budgeted operating revenue," notes
Marisol Blazquez, an analyst in Moody's sub-sovereign
team.
DIPUTACIÓN FORAL DE GUIPUZCOA
Moody's has downgraded the long-term issuer rating of Guipuzcoa
to Aa1 from Aaa, with a negative rating outlook. Although
Guipuzcoa continues to show good financials -- as evidenced by the
continued positive operating results as well as moderate debt ratios --
the province's budgetary performance has deteriorated rapidly in
recent years. Moody's notes that its revenue should remain
strained in 2010, with Guipuzcoa estimating its financing deficit
at around 18% of its operating revenue and its net direct and indirect
debt-to-operating-revenue ratio at around 50%,
which is a significant rise from 20% in 2008 (all ratios calculated
discounting collected and redistributed taxes). However,
in line with the province's latest forecast, the rating agency
anticipates a good recovery in tax collection rates in 2011, reflected
in an improvement in its budgeted financing deficit to 7% of operating
revenue and a net direct and indirect debt-to-operating
revenue ratio increasing to a contained level between 55% and 60%.
DIPUTACIÓN FORAL DE BIZKAIA
Moody's has downgraded the long-term issuer rating to Aa1
from Aaa, with a negative rating outlook. The downgrade is
driven by the weakening of the province's financial performance
in recent years, largely given the 16% decline in tax collection
between 2008 and 2009, and the maintenance of high levels of capital
expenditure. These factors led the province to release a large
financing deficit of 12% of operating revenue in 2009. For
2010, the trend is expected to slightly improve with deficit expected
at 9% of operating revenue (discounting collected and redistributed
taxes to the Basque Country) which the province projects will increase
its net direct and indirect debt stock by roughly 18% in comparison
with 2009 (to EUR1.1 billion). For 2011, Moody's
expects enhanced performance, but still resulting in a 4%
financing deficit bringing debt to 90% of operating revenues.
Moody's previous rating actions for these three entities were implemented
on 5 October 2010, when the rating agency placed on review for possible
downgrade the Aaa ratings of the Basque Country, Diputación
Foral de Guipuzcoa and Diputación Foral de Bizkaia.
The principal methodologies used in this rating were Regional and Local
Governments Outside the US published in May 2008, and The Application
of Joint Default Analysis to Regional and Local Governments published
in December 2008.
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Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
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three years preceding the Credit Rating Action. Please see the
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website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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of each rating category and the definition of default and recovery.
Madrid
Marisol Blazquez
Analyst
Sub-Sovereign Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Thomas Amenta
Senior Vice President
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Madrid
Sebastien Hay
VP - Senior Credit Officer
Sub-Sovereign Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Basque Country, Guipuzcoa and Bizkaia ratings to Aa1 from Aaa; negative outlook
No Related Data.
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