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Rating Action:

Moody's upgrades ratings of Azores and Madeira (Portugal); stable outlooks

16 Oct 2018

Madrid, October 16, 2018 -- Moody's Investors Service has today upgraded by one notch the long-term issuer ratings of the Autonomous regions of Azores (to Ba1 from Ba2) and Madeira (to Ba3 from B1) in Portugal. At the same time, the outlooks on both regions' ratings have been changed to stable from positive.

Today's rating actions on the Portuguese sub-sovereigns were triggered by: (1) the strengthening of Portugal's sovereign credit profile as captured by the upgrade of Portugal's ratings to Baa3 from Ba1 on 12 October 2018, reducing the systemic risk; (2) the improving resilience of Portugal's economic growth and ongoing fiscal improvement, which will also help strengthen the credit profile of both autonomous regions given the strong correlation between the Portuguese sovereign and sub-sovereign credit risks; and (3) a high likelihood of support from the central government towards these two autonomous regions.

For more details on the rationale for the sovereign rating change, please refer to the press release: https://www.moodys.com/research/--PR_389997

RATINGS RATIONALE

RATIONALE FOR THE RATINGS UPGRADES

Moody's believes that the improvement of the sovereign's creditworthiness -- captured by the one notch upgrade on Portugal's rating to Baa3 from Ba1 -- is also reflected at the regional level given the strong correlation between the credit risks of the autonomous regions of Azores and Madeira and the Government of Portugal, reflected in macroeconomic linkages, institutional factors and financial market conditions.

Moody's also notes that the revenue base for both autonomous regions will increase as the country's improving economic prospects will gradually result in higher shared tax revenue and growing state transfers for these two Portuguese regional governments. This will assist the regions' efforts to improve their fiscal outcomes and reduce deficit levels. In addition, although regional debt levels should continue to increase in the following two to three years, Moody's believes that the net direct and indirect debt-to-operating revenue ratio for these regions is likely to decrease, as Portugal's economy continues to improve.

Furthermore, the ratings for both regions benefit from Moody's assumption of a high likelihood of support from the central government.

-- AUTONOMOUS REGION OF AZORES

Moody's decision to upgrade the long-term issuer rating of the autonomous region of Azores by one notch to Ba1 from Ba2 reflects the rating agency's expectations that the region's high net direct and indirect debt level is going to decrease in 2018 (around 205% of operating revenue vs. 215% in 2017), as Moody's expects the region's operating revenue to increase.

In addition, Moody's believes that Azores's positive gross operating balance will increase in 2018 and will continue to grow in the following years, helping the region's finances to reduce its financing deficit of -7% of operating revenue in 2017.

-- AUTONOMOUS REGION OF MADEIRA

The upgrade of Madeira's long-term issuer rating reflects the strong linkage between Madeira and the Government of Portugal, given that 86% of Madeira's debt is either through or guaranteed by the Government of Portugal. Hence the improvement of Portugal's creditworthiness is reflected in Madeira's Ba3 rating despite the continued intrinsic credit weakness of Madeira, as represented in its Baseline Credit Assessment of caa2.

Moody's notes that in 2017, the region posted a negative gross operating performance of -12% of operating revenue, a sizeable deficit of -25% of operating revenues, and very high debt metrics of 431% of operating revenue at year-end 2017.

However, Moody's also notes that the region continues to work with the central government on a long-term plan to reduce its high debt levels of 108% of regional GDP in 2017 and commercial debt stock. Moody's views the region's debt as unsustainable without central government support. Although commercial debt levels are still high, Moody's recognises the efforts that the region has taken to reduce its accumulated commercial debt to €547 million at year-end 2017 from close to €3 billion in 2012 (around €300 million forecasted at year-end 2018).

RATIONALE FOR STABLE OUTLOOK

Moody's decision to change the outlook to stable from positive on the autonomous regions of Azores and Madeira reflects the rating agency's view that these two Portuguese regional governments will benefit from higher tax revenue and more transfers from the central government, as the Portuguese economy improves, as well as Moody's expectation that both regions' debt stocks will continue to be very high. At the same time, the stable outlook mirrors the outlook for the government of Portugal (Baa3 stable).

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward pressure would develop on Azores and Madeira if their fiscal and financial performance were to improve. In addition, the strengthening of Portugal's credit profile, as reflected by an upgrade of the sovereign rating, could have credit implications, reducing the systemic risk, for the Portuguese sub-sovereigns in general.

A downgrade of Portugal's sovereign rating, leading to indications of weakening government support for the regions, or a deterioration in their fiscal performance, would likely lead to a downgrade of the sub-sovereign entities.

The sovereign action required the publication of these credit rating actions on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

The specific economic indicators, as required by EU regulation, are not available for these entities. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Portugal, Government of

GDP per capita (PPP basis, US$): 30,487 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.8% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.6% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -3% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.5% (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 11 October 2018, a rating committee was called to discuss the rating of the Azores, Autonomous Region of; Madeira, Autonomous Region of. The main points raised during the discussion were: The systemic risk in which the issuer operates has materially decreased.

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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