[Moody's] Moody's downgrades Campania, Lazio, Piedmont and Sicily; negative outlook
martedì 28 maggio 2013
Milan, May 28, 2013 -- Moody's Investors Service has today downgraded by one notch to Ba1 from Baa3 the ratings of the Italian regions of Campania, Piedmont and Sicily. At the same time, Moody's has downgraded the rating of the Italian region of Lazio by two notches to Ba2 from Baa3. The outlooks on these entities' ratings are negative.
RATIONALE FOR THE DOWNGRADES
The downgrades reflect heightened concerns about these regions' financial positions in the current environment. Austerity-driven cuts in central government resources are stressing regional budgets, resulting in growing fiscal rigidity. Ongoing liquidity pressures have contributed to the accumulation of sizeable overdue payables and commercial debts. These regions are expected to cover a large proportion of this accumulated imbalance by incurring sizeable new borrowing from the national government under a recently introduced funding arrangement.
Significant new long-term borrowing to refinance commercial debt exposures will further constrain the budgets of Campania, Lazio and Piedmont, which already display high debt loads and inflexible budgets.
Among these regions, Lazio is expected to face the highest increase in financial leverage. Although this will partially clean up regional accounts in the short term, Moody's expects that these regions will likely have to further consolidate their accounts, including challenging expenditure rationalizations and tax hikes. Lower anticipated central government resources, including the national healthcare funding, will likely complicate these consolidation efforts, which are key to avoid further accumulation of accounts payable and manage liquidity pressure.
While Moody's expects Sicily to face only a moderate increase in debt levels to clear overdue payables, today's downgrade primarily reflects continued fiscal slippage and the challenges stemming from its weak and demanding socio-economic environment.
For more detail on Moody's view of regional borrowing needs, please refer to its Special Comment entitled "Italian Regions: Refinancing of Commercial Debts Will Increase Leverage of Weakest Issuers", published on
Detailed ratings rationales for individual regions are provided below.
-- REGION OF CAMPANIA --
Moody's has downgraded Campania's issuer and debt ratings by one notch to
Ba1 from Baa3. Campania's Ba1 ratings reflect inherent fiscal rigidities, high commercial and financial debt exposure. Going forward, Moody's expects a sizeable increase in the region's financial leverage to clear overdue payables. The rating agency anticipates that Campania's net direct and indirect debt will increase by at least EUR2 billion by YE2014, from the EUR7.6 billion debt outstanding at year-end 2012 (representing about 62% of latest realized operating revenue)
Campania is exposed to a frail and demanding socio-economic environment, as reflected by a GDP per capita substantially below the national average and high unemployment levels, which may challenge any future consolidation initiative that will be implemented by the region in response to growing fiscal rigidity.
The rating agency does note, however, that these challenges are partially mitigated by Campania's recently improved cash flows and commitment to cleaning-up and streamlining its budget, including in particular the healthcare sector
-- REGION OF LAZIO --
Moody's has downgraded Lazio's debt rating by two notches to Ba2 from Baa3. Among the regions affected by today's action, Moody's notes that Lazio faces the highest level of financial pressure and will likely experience the greatest increase in financial leverage going forward.
Lazio displays a stretched budget, which features a large accumulated budgetary imbalance, very high debt burden, and cash flow strains, which are reflected in the region's extensive recourse to cash advances from its treasurer banks.
As Lazio has the largest proportion of overdue payables among Italian regions and a stretched liquidity position, Moody's expects that the region will take on the largest amount of debt among Italian regions. The rating agency projects that Lazio's net direct and indirect debt will increase by between EUR3 billion and EUR5 billion by YE2014, from the EUR10.9 billion debt outstanding at year-end 2012 (representing about 79% of latest realized operating revenue)
To accommodate growing debt-servicing costs, Moody's expects that Lazio is likely to further consolidate its budget and make extensive recourse to its tax-raising flexibility. Lazio's large tax base only partly mitigates the challenges associated with these consolidation efforts in the current environment. Although operating deficits have been reduced in recent years, Moody's believes that streamlining the healthcare sector is a key challenge for Lazio.
--REGION OF PIEDMONT--
Moody's has downgraded Piedmont's issuer and debt ratings by one notch to
Ba1 from Baa3. Piedmont's Ba1 ratings reflect the region's weak financials, as evidenced by its large accumulated budgetary imbalance and a fragile cash flow profile. The ratings also consider Piedmont's high debt levels, which are likely to increase further by the end of 2014 given the need to clear overdue accounts payable. Moody's projects Piedmont's net direct and indirect debt to increase by between EUR1.7 billion and about EUR3 billion by YE2014, from the EUR7.1 billion debt outstanding at year-end 2012 (representing 72% of pre-closing operating revenue for the year). This will add long-term rigidity to the regional budget.
While Moody's acknowledges that the region has taken steps to protect itself against refinancing risk at maturity, the rating agency notes that Piedmont remains exposed to legal and financial risks stemming from last year's decision to cancel five swap contracts covering EUR1.86 billion in debt.
In response to growing fiscal pressure, Piedmont is currently enacting recovery plans in the healthcare and transport sectors, both of which have historically exerted pressure on the regional budget.
--AUTONOMOUS REGION OF SICILY--
The downgrade to Ba1 from Baa3 concludes the review for downgrade on Sicily's issuer and senior unsecured debt ratings, initiated on 26 July 2012, and captures the region's deteriorating operating performance and sizeable budgetary deficit that it reported in 2012. These indicators illustrate the challenges associated with a stagnant revenue and rigid expenditure profile. Going forward, Moody's notes that the sluggish regional economy will likely constrain Sicily's tax revenue and complicate fiscal-consolidation initiatives planned by the region. In contrast to its ordinary-statute peers, Sicily's budget is directly exposed to the performance of the regional economy, which displays below-average wealth and employment levels and relies extensively on regional spending.
Moreover, in line with the other Italian regions affected by today's rating action, Moody's expects Sicily to take on new loans of at least
EUR1 billion to cover overdue payables by YE2014, from EUR5.7 billion net direct and indirect debt outstanding at year-end 2012 (representing 40% of pre-closing operating revenue for the year).
The senior secured debt rating assigned to Sicily's state-serviced issuance was affirmed at Baa2 and remains aligned to the sovereign rating.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative rating outlooks account for the execution risks associated with the consolidation initiatives that these regions are expected to implement in the current environment. They also mirror the negative outlook on Italy's sovereign rating and reflect systemic pressure.
WHAT COULD CHANGE THE RATINGS UP/DOWN
An inability on the part of these four regions to consolidate regional finances in response to increased fiscal rigidity and/or growing liquidity pressure will exert downward rating pressure. In addition, a downgrade of Italy's sovereign rating could trigger downgrades of these sub-sovereign ratings.
Conversely, a stabilisation of the outlooks or an upgrade of these ratings would require a stabilisation of the outlook or upgrade of the sovereign rating, or evidence of an individual region's ability to effectively manage increased fiscal pressure and improve its financial and debt metrics.
The principal methodology used in these ratings was Regional and Local Governments, published in January 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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