Madrid, March 18, 2011 -- Moody's Investors Service has today implemented the following downgrades
for Portuguese regional and local governments:
- City of Cascais: downgraded by two notches to A3 from A1
- City of Lisbon: downgraded by one notch to A3 from A2
- City of Sintra: downgraded by two notches to A3 from A1
- Autonomous Region of the Azores: downgraded by two notches
to Baa1 from A2
- Autonomous Region of Madeira: downgraded by three notches
to Baa2 from A2
The rating outlooks for these regional and local governments (RLGs) are
negative. Today's rating actions conclude the review for
possible downgrade of Portuguese RLGs initiated on 21 December 2010.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADES
Today's downgrades were prompted by Moody's downgrade of Portugal's sovereign
rating to A3/negative from A1/under review for downgrade on 15 March 2011.
The downgrade of Portugal's government bond ratings has implications for
the ratings of RLGs within the country given the close operational and
financial linkages between the central government and its RLGs.
"Although Portuguese RLGs maintain some autonomy over their financial
management, they remain dependent upon transfers to fund their operations,"
explains Sebastien Hay, a Vice President and Senior Credit Officer
in Moody's Sub-Sovereign Group. The central government also
preserves a high degree of oversight on the sector via legislation,
imposing strict limits on tax rates and debt levels.
CITIES OF SINTRA AND CASCAIS
Moody's highlights the weakening in the revenue flexibility of rated Portuguese
municipalities over the past few years, given slowing tax-revenue
growth (especially in property transfer tax). Moody's considers
that the fiscal consolidation measures announced last week by the central
government will not diminish the reliability of its transfers paid to
Portuguese municipalities. Nevertheless, the rating agency
believes that rated Portuguese municipalities are unlikely to have a sufficient
independent financial capacity to permit their credit quality to be stronger
than that of the sovereign itself. Moody's has therefore downgraded
the ratings of Sintra and Cascais to A3 from A1, in line with the
ratings of the sovereign.
CITY OF LISBON
The City of Lisbon was downgraded to A3 from A2, reflecting the
challenges the city will face in limiting the growth of its operating
expenditure so that it can pay its capital expenditure from surpluses
and without adding to what is already a very high debt burden over the
next two to three years. Nevertheless, Moody's views
positively the slight decrease in Lisbon's debt-to-revenue
ratio in 2010 and the city's plans to pay down a substantial portion
of its commercial obligations in 2011 from asset sales, even if
the sales may not all occur as planned this year. Going forward,
Moody's believes that Lisbon will continue to operate under tight
budget constraints in the form of low tax revenue growth, which
maintains pressure on its rating.
AUTONOMOUS REGIONS OF THE AZORES AND MADEIRA
The downgrades of the Autonomous Regions of the Azores and Madeira reflect
the substantial increase in their direct and indirect debt levels,
a trend that Moody's believes is unlikely to reverse in the foreseeable
future. The risks for the Autonomous Region of Madeira are heightened
by its significantly higher debt metrics than those of Azores.
These concerns are exacerbated by the regions' decrease in tax revenue,
which is expected to recover only slowly, and their rigidity in
operating expenditure imposed by the large share of healthcare and personnel
costs.
RATIONALE FOR THE NEGATIVE OUTLOOKS
The outlook for all Portuguese RLGs is negative, reflecting primarily
the weak prospects for growth in the Portuguese economy for the next two
to three years, which will limit tax revenue going forward,
whilst essential services and personnel costs will remain difficult to
cut rapidly.
The last rating actions on Cascais, Lisbon, Sintra,
Azores and Madeira were as follows:
- Cascais: Long-term issuer rating placed on review
for downgrade on 21 December 2010.
- Lisbon: Long-term issuer rating placed on review
for downgrade on 21 December 2010
- Sintra: Long-term issuer rating placed on review
for downgrade on 21 December 2010.
- Azores: Long-term issuer rating placed on review
for downgrade on 21 December 2010.
- Madeira: Long-term issuer rating placed on review
for downgrade on 21 December 2010.
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.
REGULATORY DISCLOSURES
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
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
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
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
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
London
David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
Moody's Investors Service Ltd.
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 five Portuguese regional and local governments; outlooks negative
