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Rating Action:

Moody's downgrades Spanish sub-sovereigns; negative outlook

19 Oct 2011

Madrid, October 19, 2011 -- Moody's Investors Service has downgraded the long-term ratings of nine Spanish regions, two Basque provinces and five government-related ratings by one or two notches. The outlook on the ratings is negative. At the same time, the rating of Castilla--La Mancha was downgraded by five notches to Ba2 from A3 and remains on review for downgrade.

The rating actions conclude the review for possible downgrade initiated for eight ratings on 29 July 2011.

A full list of affected ratings actions can be found at the end of this press release.

RATINGS RATIONALE

The downgrades of Spanish sub-sovereigns were prompted by:

(i) Moody's downgrade of the government of Spain to A1 from Aa2 with a negative outlook on 18 October 2011. For full details, please see Moody's press release 'Moody's downgrades Spain's government bond rating to A1, negative outlook'.

(ii) Growing liquidity pressures. Large financing needs alongside constrained access to long-term funding sources have forced regions to deplete their cash reserves, extensively use short-term credit lines, and expand their commercial debt obligations.

(iii) Persistent fiscal imbalances due to the regions' difficulty in reining in their cost bases significantly. Spanish regions, on average, recorded a deficit-to-GDP ratio of 1.2% in H1 2011, against the deficit target of 1.3% for the full-year. Moreover, poor national economic prospects for 2012-13 will limit regional tax proceeds -- about three-quarters of their budgets -- and complicate fiscal consolidation plans.

- ENTITIES RATED ABOVE THE SOVEREIGN

The downgrades of the Basque entities' ratings (Basque Country, Diputacion Foral de Guipuzcoa and Diputacion Foral de Bizkaia) by two notches to Aa3 with negative outlook from Aa1 reflect the same economic pressures that prompted the sovereign rating downgrade. However, the Basque entities' unique and constitutionally protected tax regime currently allows them to retain enough credit strength to maintain their ratings one-notch above that of the sovereign. In addition, their limited borrowing needs this year and next limit the impact of difficult market conditions on their financial performances.

- ENTITIES RATED AT THE SOVEREIGN LEVEL

The downgrades of Extremadura, Galicia and Madrid's ratings by two notches to A1 with negative outlook -- in line with the sovereign -- from Aa2 reflect Moody's opinion that these regions do not have the required fiscal manoeuvrability nor the institutional strength to maintain a rating above the sovereign. Comparable rating levels with the sovereign reflect the financial and operational linkages between these regions and the central government as well as similarly constrained economic and financing environments weighing on their credit profiles.

- ENTITIES RATED BELOW THE SOVEREIGN

The downgrade by one notch of Catalunya's ratings to Baa2 with negative outlook from Baa1 reflects its significant liquidity pressures, as the region's extensive financing needs come in the context of an increasingly difficult market environment and constrained access to long-term funding sources. However, Moody's notes that Catalunya, unlike some of its peers, has taken measures to rein in costs and sees its fiscal trajectory as progressively stabilising, as illustrated by its deficit of 1.0% of its GDP at end-H1 2011 (vs. 1.2% in H1 2010). The continuation of this trend would bring Catalunya's deficit closer to the target set by the central government in the next few years.

The two-notch downgrade of the ratings of Andalucia and Castilla y León (to A2 negative from Aa3), Murcia (to Baa1 negative from A2), and Generalitat de Valencia (to Baa2 negative from A3) reflects the pressures on their fiscal positions and the ordinal ranking of their credit quality relative to the sovereign. The relative ranking continues to reflect differing financial, economic and institutional strengths, which ultimately translate into diverse capabilities to withstand a deteriorating operating environment and successfully implement austerity measures.

The downgrade of Castilla-La Mancha by five notches to Ba2 from A3 reflects recently disclosed features which Moody's considers incompatible with an investment-grade rating. In particular, they refer to the structural and substantial weakening in the region's financial fundamentals, largely as the result of the emergence of unexpectedly large deficits and commercial liabilities following a recent audit of its accounts. This adds significant liquidity pressure and exacerbates the continued deterioration in the region's fiscal and debt metrics, which are amplified by its very high dependence on credit line facilities -- a negative credit feature in the current funding environment.

The region's stock of commercial liabilities is forecasted to reach around EUR3.1 billion at YE2011 or 59% of the region's operating revenue. Poor accountability and inadequate checks and balances have fostered inefficiencies within the administration, which itself has been unable to provide adequate estimates of its fiscal performances over the past year. Moreover, the region's stock of commercial debt is likely to take several years to absorb. As Castilla-La Mancha is unlikely to record a budget surplus for some time, repaying its commercial obligations will require it to incur more costly financial debt or may even require financial support from the central government.

- RATIONALE FOR THE REVIEW FOR DOWNGRADE OF CASTILLA-LA MANCHA

The Ba2 rating of Castilla-La Mancha is on review for downgrade. While acknowledging that the new regional government elected in May has drafted ambitious saving measures -- notably the reduction of operating expenses by approximately 20% by the end of 2012 -- the review will examine the feasibility of the proposed measures. In addition, the rating agency will focus on the region's plans to finance its large commercial obligations, including outstanding payments to two shadow toll road projects.

RATIONALE FOR THE NEGATIVE OUTLOOK

The outlook is negative for all other rated Spanish sub-sovereigns, reflecting (i) Spain's weak economic growth prospects, which will likely continue to adversely affect the regional tax base; and (ii) uncertainty associated with the regions' ability to meet its forthcoming borrowing requirements at an affordable cost in the context of constrained market conditions.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Stabilisation of the outlooks or an upgrade to the ratings would require (i) the stabilisation or upgrade of the sovereign rating; and (ii) detailed plans from the regional administrations to restore their fiscal performances and reverse debt ratios.

Further deterioration of the operating environment in Spain that would put pressure on the sovereign rating would also negatively affect the ratings of the Spanish sub-sovereigns. Additionally, failure of any individual sub-sovereign to progress towards fiscal consolidation targets would add pressure to that specific rating.

RATINGS AFFECTED

The following regional and local governments are affected by today's rating action:

- Basque Country: long-term issuer and debt ratings downgraded to Aa3 from Aa1; outlook negative

- Diputacion Foral de Guipuzcoa: long-term issuer rating downgraded to Aa3 from Aa1; outlook negative

- Diputacion Foral de Bizkaia: long-term issuer rating downgraded to Aa3 from Aa1; outlook negative

- Comunidad Autónoma de Galicia: long-term issuer rating downgraded to A1 from Aa2; outlook negative

- Comunidad Autónoma de Madrid: long-term issuer rating downgraded to A1 from Aa2; outlook negative

- Junta de Extremadura: long-term issuer rating downgraded to A1 from Aa2; outlook negative

- Junta de Andalucia: long-term issuer and debt ratings downgraded to A2 from Aa3; outlook negative

- Junta de Castilla y Leon: long-term issuer and debt ratings downgraded to A2 from Aa3; outlook negative

- Comunidad Autonoma de Murcia: long-term issuer and debt ratings downgraded to Baa1 from A2; outlook negative

- Region of Valencia: debt ratings downgraded to Baa2 from A3; outlook negative; short-term rating downgraded to Prime-3 from Prime-2

- Castilla-La Mancha: long-term issuer and debt ratings downgraded to Ba2 from A3; under review for downgrade

- Catalunya: long-term issuer rating downgraded to Baa2 from Baa1; outlook negative; short-term rating downgraded to Prime-3 from Prime-2

The following government-related ratings are affected:

- Consorcio de Transportes de Bizkaia: long-term issuer rating downgraded to Aa3 from Aa1 in line with Basque Country 's downgrade; outlook negative.

- Instituto Valenciano de Finanzas: debt ratings downgraded to Baa2 from A3, in line with the Generalitat de Valencia's downgrade; 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): downgraded to Baa2 from A3, in line with the Generalitat de Valencia's downgrade; outlook negative.

- Notes of Feria Valencia: underlying rating downgraded to Baa2 from A3 with a negative outlook (A and B Certificates); the rating of Feria Valencia's notes remains at Aa3/negative, in line with the financial guarantee provided by Assured Guarantee (Europe) Ltd (formerly, Financial Security Assurance (UK) Ltd).

METHODOLOGIES USED

The methodologies used in this rating 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.

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 rating have been disclosed to the rated entities or its 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, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

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

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

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 downgrades Spanish sub-sovereigns; negative outlook
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