NOTE: On July 26, 2022, the press release was corrected as follows: In the List of Affected Ratings accessible via hyperlink from this press release, the rating class for ISIN ES0282103003, issued by Universities of Valencia, was changed to “Senior Secured – Underlying (Domestic).”
Madrid, July 22, 2022 -- Moody's Investors Service (Moody's) has today upgraded the long-term issuer and senior unsecured ratings of the Generalitat de Catalunya (Catalunya) to Ba1 from Ba2. The outlook remains stable. At the same time, Moody's has affirmed the Ba1 senior unsecured ratings of the Generalitat de Valencia (Valencia) and has changed the outlook to stable from negative. Furthermore, Moody's has affirmed the long-term issuer and senior unsecured ratings of the Principado de Asturias (Asturias) and the Junta de Castilla y Leon (Castilla y Leon) at Baa1. The outlook on both remains stable. Asturias's short-term issuer rating of Prime-2 has also been affirmed. Lastly, Universities of Valencia's senior secured and underlying senior secured ratings have been affirmed at Ba1. The outlook has been changed to stable from negative.
Catalunya's rating upgrade to Ba1 from Ba2 reflects the region's improvement in its financial metrics in recent years and Moody's view that its fiscal performance will be resilient to the current more challenging economic conditions expected over the near to medium term.
Valencia's outlook change to stable from negative reflects better fiscal results and a lower debt burden than Moody's initial expectations when assigning the negative outlook in March 2021, which Moody's also expects to be maintained even as growth slows and inflation remains relatively high.
The affirmation of Asturias's and Castilla y Leon's ratings reflects Moody's view that the expected financials for these two regions in the medium-term will continue to be adequately captured by their current ratings. In addition, Moody's expects a gradual decline in their debt burdens over the next two years, with enough fiscal space to absorb any future budget pressure.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL467660 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATIONALE FOR THE RATING UPGRADE OF THE GENERALITAT DE CATALUNYA WITH A STABLE OUTLOOK
The upgrade of Catalunya's long-term issuer and debt ratings to Ba1 from Ba2 reflects the region's improved fiscal performance in recent years and Moody's expectations that the region's financial performance will remain resilient despite the more challenging economic conditions. While its deficit will remain high over the medium term as social and health spending, including some lasting COVID-related expenses, will continue to pressurize expenditure, tax revenue growth should help Catalunya to continue reducing its debt burden. According to Moody's baseline forecasts, the region's debt should represent 239% of its operating revenue in 2024, against 255% in 2021. While higher inflation combined with slower growth represent downside risks to this baseline, leading to potentially higher deficit and debts levels, Moody's notes that Catalunya's debt structure is relatively protected from increasing interest rates. In recent years, the region has significantly reduced its short term debt and lengthened the maturity of its debt, 89% of its direct debt which is with the government liquidity facilities. In addition, Moody's believes that the significant Next Generation EU funds that the region will receive in the coming years of around €3.5 billion will support the economy.
Catalunya's ratings of Ba1 reflect a Baseline Credit Assessment (BCA) of b1 which Moody's has upgraded by one notch given the improvement of the region's standalone credit profile explained above, and Moody's assumption of a high likelihood of extraordinary support from the central government.
The stable outlook reflects Moody's expectations that the region's wealthy and diversified economy will continue to support Catalunya's fiscal performance. Moreover, the region's strong governance and prudent budget management further support the stable outlook.
RATIONALE FOR THE RATING AFFIRMATIONS OF THE REGIONS OF ASTURIAS AND CASTILLA Y LEON WITH STABLE OUTLOOK
Moody's decision to affirm the Baa1 long-term issuer and debt ratings for Asturias and Castilla y Leon, on par with the sovereign rating, reflects their strong fiscal and financial performance despite the negative effects of the pandemic which supports the view that their credit profile will be resilient to the current unfolding shock.
Their deficits are well-controlled and their debt levels, although increasing in 2022, are expected to remain manageable and consistent with their current rating levels. Both regions will benefit from ongoing, albeit slow, GDP growth in the following two years, increasing their tax revenue collection and thus reducing their debt burdens by 2024. At the same time, both regions benefit from reliable market access and low interest payments (representing 0.8% of operating revenue for Asturias in 2021 and 1.7% for Castilla y Leon the same year). Moreover, their prudent debt management practices and low-to-moderate financing requirements will limit the impact of current rising interest rates; 83% and 88% of the regions' outstanding direct debt was contracted at fixed interest rates at year-end 2021 for Asturias and Castilla y Leon, respectively.
The affirmation of Asturias' short-term rating of P-2 reflects the region's robust liquidity profile and Moody's expectation that it will continue to be solid in the following two years, with significant cash on hand and limited short-term debt.
The Baa1 ratings of these two regions reflect the combination of their standalone credit profiles of baa3, and Moody's assumption of a high likelihood of extraordinary support from the Government of Spain.
While negative near-term risks prevail as inflationary pressures rise and the real economy slows in a highly uncertain global environment, the two regions will receive significant EU funding, which should support their economies and help control deficit and debt levels in the coming years, despite persistent cost pressures on healthcare and social care. The stable outlooks on these two regions also reflect the outlook on the Spanish government.
RATIONALE FOR OUTLOOK CHANGE TO STABLE AND AFFIRMATION OF THE GENERALITAT DE VALENCIA'S RATING
The Generalitat de Valencia's outlook change to stable from negative reflects Moody's view that the region's debt-to-revenue trajectory will be better than initially anticipated and that debt metrics will remain materially lower than earlier expected in the next few years. Valencia benefited from nearly €2.8 billion in additional transfers provided by the central government to mitigate the impact of the pandemic on the region's finances between 2020 and 2021. In addition, the region will also receive around €3 billion from the Next Generation EU funds until 2023, a significant amount that will support the regional economy and help Valencia maintain stable financial metrics.
Moody's also expects that Spain's economic growth for the following two years, will help Valencia to collect a higher amount of tax revenue. The combination of a higher level of operating revenue than initially anticipated and a lower debt starting point, will lead the region's debt burden to evolve at the same pace than its national peers, with a slight increase in 2022 and an improvement for the following two years until 2024. Moody's forecasts a debt burden of around 340% by the end of 2022, with a reduction to around 317% in 2024.
The affirmation of Valencia's Ba1 long-term debt rating is based on the combination of the region's standalone credit profile, as reflected in its Baseline Credit Assessment (BCA) of b3, and Moody's assumption of a high likelihood of extraordinary support from the central government.
The affirmation of Valencia's BCA of b3 mainly reflects the region's very high debt burden (321% at year-end 2021 vs 170% on average for rated regions). Its debt to GDP is the highest among Spanish regions, equivalent to 48% of its GDP in 2021 compared with 26% on average at national level.
Moody's views positively the high support received from the central government to date via the "Fondo de Liquidez AutonÃ³mico" (FLA), which is expected to continue to be forthcoming. At present, around 87% of the region's outstanding direct debt comes from the FLA. The rating agency expects that an additional €8.1 billion will be financed through the FLA in 2022.
Moody's also affirmed the underlying rating of the Universities of Valencia at Ba1 and changed the outlook to stable from negative, in line with the Generalitat de Valencia's rating.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Catalunya's exposure to environmental risks is low with some episodes of heat stress. Its overall E issuer profile score is therefore Neutral-to-Low (E-2).
Moody's assesses Catalunya's social issuer profile score as Neutral-to-Low (S-2), reflecting low exposure to social risks across most categories. Moody's considers the coronavirus outbreak to be a social risk that will significantly weaken the region's financial position, through negative economic growth and higher expenses. Spanish regions are responsible for healthcare, which typically represents around 40% of expenses. Other social aspects include an ageing population, which will also lead to increasing social and healthcare expenditure over the long-term. However, given the region's dynamic economy, population growth and large tax base, expenditure pressures will likely be more manageable for Catalunya compared to other Spanish regions.
Catalunya's institutions and governance strength are reflected in a Neutral-to-Low profile score (G-2). Catalunya has a strong administration and sophisticated governance which constitute a factor of stability. In addition, the region's implementation of budgetary control plans is indicative of positive management actions. The region also provides transparent and timely financial reports.
Asturias's exposure to environmental risks is low across all categories. Its overall E issuer profile score is therefore Neutral-to-Low (E-2).
Moody's assesses Asturias's social issuer profile score as Highly Negative (S-4), mainly due to high demographic risks as well as risks related to labour and income. Asturias's ageing population puts pressure on healthcare and social spending, which are key responsibilities of the region. Other social aspects are the region's unfavourable labour market conditions, including high unemployment rate, and the pandemic associated social risks. The region's exposure to other social risks, such as housing, health and safety issues and access to basic services is low or very low.
Asturias's sound governance is reflected in a Neutral-to-Low G issuer profile score (G-2). Moody's considers the region's debt structure and management to be conservative and predictable, which is also reflected in its good budgetary performance. The region also provides transparent and timely financial reports.
CASTILLA Y LEON
Castilla y Leon's exposure to environmental risks is low across all categories. Its overall E issuer profile score is therefore Neutral-to-Low (E-2).
Exposure to social risks is highly negative (S-4). Moody's assesses Castilla y Leon's S issuer profile score as highly negative, reflecting a high portion of ageing population, which will also affect social and healthcare expenditure, typically representing around 40% of the regions' expenses. Castilla y Leon has one of the highest proportions of residents aged above 65 years among the Spanish regions Moody's rates, which increases the share of healthcare spending in its budget to a level higher than the national average. Castilla y Leon's social aspects also reflect a good housing availability, and good quality health & safety and access to basic services.
Castilla y Leon's governance issuer profile score is Neutral-to-Low (G-2). Moody's considers the region's debt structure and management conservative and predictable, reflected in the region's improving budgetary performance. The region also provides transparent and timely financial reports.
Valencia's overall environmental issuer profile is highly negative (E-4), reflecting exposure to environmental risks across a range of categories, such as physical climate risks mainly concentrated on heat stress and sea level rise. Valencia is also vulnerable to water stress caused by high water demand from its primary and tourism sectors, combined with the region's scarce hydrological resources.
Moody's assesses Valencia's social issuer profile score as moderately negative (S-3), reflecting moderate risks with regards to unfavourable labour market outcomes, with high youth unemployment. Other social aspects include a relatively low share of population with higher degree education, risks associated to the pandemic and the ageing population, which will also affect social and healthcare expenditure. Spanish regions are responsible for social, healthcare and education, which typically represents around 60% of their expenses. Exposure to other social risks such as housing, health and safety issues and access to basic services is low or very low.
Valencia's governance issuer profile is highly negative (G-4), reflecting its weak fiscal performance and weaknesses in its financial planning, as evidenced by its high operating and financing deficit levels.
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: Spain, Government of
GDP per capita (PPP basis, US$): 41,839 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 5.1% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.6% (2021)
Gen. Gov. Financial Balance/GDP: -6.9% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.9% (2021) (also known as External Balance)
External debt/GDP: 185% (2021)
Economic resiliency: a2
Default history: No default events (on bonds or loans) have been recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 19 July 2022, a rating committee was called to discuss the rating of the Asturias, Principado de; Castilla y Leon, Junta de; Catalunya, Generalitat de; Valencia, Generalitat de. The main points for the Generalitat de Catalunya raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially increased. In addition, an analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. The main points for the Principado de Asturias, the Junta de Castilla y Leon and the Generalitat de Valencia raised during the discussion were: The issuers' fiscal or financial strength, including their debt profiles, have not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The strengthening of SpainÂ´s credit profile, as reflected by an upgrade of the sovereign rating, would result in upward pressure on Spanish regions in general, particularly on Asturias and Castilla y Leon's ratings since their ratings are currently on par with the sovereign. Additionally, Moody's would consider upgrading Valencia's ratings if its fiscal and financial performance significantly improved.
Upward pressure on the ratings of Catalunya could arise if its fiscal metrics continue improving faster than Moody's currently expects, resulting in line or better gross operating balances and debt burdens.
In contrast, downward pressure on the ratings for Asturias, Castilla y Leon, Valencia and Catalunya could occur if any of these four regionsÂ´ fiscal performance deteriorated. In addition, a downgrade of the sovereign rating, or any indication of weakening government support, would likely lead to a downgrade of these four regionsÂ´ ratings.
The principal methodology used in rating Asturias, Principado de, Castilla y Leon, Junta de, Catalunya, Generalitat de and Valencia, Generalitat de was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. The principal methodology used in rating Universities of Valencia was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017 and available at https://ratings.moodys.com/api/rmc-documents/75699. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Â Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL467660 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
• EU Endorsement Status
• UK Endorsement Status
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Asst Vice President - Analyst
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
MD - Sovereign Risk
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454