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Moody’s just downgraded the credit ratings of five Spanish regions and confirmed current ratings on five others.The downgrade comes on the heels of regional elections in Spain. The outcomes today were seen as favourable for Spanish PM Mariano Rajoy’s ruling government.
Catalunya, one of the regions downgraded by Moody’s and perhaps Spain’s most economically important region, doesn’t hold elections until late November.
There are fears that Catalunyans, who like to distinguish between themselves and the rest of Spain, could entertain the possibility of secession.
Here is the full press release:
Moody’s Investors Service has today downgraded by one or two notches the ratings assigned to five Spanish regions — Andalucia, Extremadura, Castilla-La Mancha, Catalunya, and Murcia.
At the same time, Moody’s has today confirmed the ratings of the Basque Country and the Diputacion Foral de Bizkaia at Baa2, one notch above the sovereign bond ratings. In addition, the ratings of the regions of Madrid, Castilla y Leon and Galicia have also been confirmed at Baa3, on par with the sovereign ratings. Finally, the ratings of the region of Valencia and of four government-related entities in Valencia have been confirmed at B1.
Further to these rating actions, all affected regions carry negative outlooks in line with the negative outlook carried by the Baa3 sovereign bond rating of the Government of Spain. Today’s rating actions conclude the review for downgrade that Moody’s initiated on 15 June 2012.
A detailed list of the issuers and ratings affected by this rating action is provided at the end of this press release.
For additional information on Sovereign ratings, please refer to the webpage containing Moody’s related announcements http://www.moodys.com/eusovereign.
-RATIONALE FOR THE DOWNGRADES
–REGIONS OF ANDALUCIA, CASTILLA LA MANCHA, CATALUNYA, MURCIA
Moody’s decision to downgrade the ratings of the four Spanish regions of Andalucia (to Ba2 from Baa3), Castilla-La Mancha (to Ba3 from Ba2), Catalunya (to Ba3 from Ba1) and Murcia (to Ba3 from Ba1) was driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs.
In addition, Catalunya, Andalucia and Murcia face large debt redemptions in Q4 2012 when retail bonds issued in 2011 are due to mature. In this context, five regions — namely, Catalunya, Andalucia, Murcia, Valencia and Castilla La Mancha — have already requested liquidity support from the Fondo de Liquidez Autonomico (FLA) to cover their financing needs in the second half of 2012.
While the FLA greatly reduces the risk of a region’s liquidity driven default in the short term, it does not address their fundamental economic and financial weaknesses, namely: (1) the significant uncertainty regarding viable long-term funding alternatives, and the resulting considerable reliance on government funding; and (2) the regions’ significant difficulties in controlling their deficit and debt trajectories in an economic environment in which the implementation of cost-cutting measures to redress the regions’ structural deficits will likely take longer than expected.
Thus, Moody’s assesses the standalone creditworthiness (Baseline Credit Assessment or BCA) of regions having requested FLA funding as being very weak, reflecting our view that these regions would have serious difficulties in meeting debt obligations without it. The very low BCAs also reflect Moody’s view that these regions, faced with persistent fiscal challenges and weak liquidity positions, will need to seek further external support in the next year. At the same time, their ratings incorporate Moody’s assessment of a heightened likelihood of government support, as corroborated by the central government’s track record of support over the last few months, which partially offsets the very weak standalone creditworthiness.
For full details, please refer to Moody’s Special Comment “FLA Alleviates Pressure on Spanish Regions but Economic and Financial Weaknesses Persist” at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_146588.
–REGION OF EXTREMADURA
Moody’s decision to downgrade Extremadura’s rating by one notch to Ba1 from Baa3 reflects the region’s persistently high operating deficits and its weak liquidity position. While the savings measures that the region is currently implementing will help lower the deficit from the 4.59% recorded in 2011, poor budget results in H1 2012 suggest that Extremadura will likely miss the deficit target by a wide margin. Moreover, Moody’s assesses the region’s liquidity position as being weak, as evidenced by its extensive use of short-term credit lines. While Extremadura has limited refinancing needs in 2012, its large deficit expected in 2012 will result in significant borrowing needs (EUR494 million, or 13% of its operating revenue), for which it has only been able to secure EUR56 million to date.
-RATIONALE FOR RATINGS CONFIRMATION
–THE BASQUE COUNTRY AND THE PROVINCE OF BIZKAIA
Moody’s decision to confirm the Baa2 ratings of the Basque Country and the province of Bizkaia reflects the confirmation of the sovereign bond ratings on 16 October 2012 as well as their unchanged fiscal and financial positions since their downgrade on 15 June 2012. The unique and constitutionally protected tax regime of the Basque Country and the province of Bizkaia 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 in 2012 and 2013 as well as their comfortable liquidity positions limit the impact of difficult market conditions on their financial performances.
— REGIONS OF CASTILLA Y LEON, GALICIA AND MADRID
The rating agency’s decisions to confirm the Baa3 regions of Castilla y Leon, Galicia and Madrid also reflects the confirmation of the sovereign bond ratings on 16 October 2012 and the regions’ unchanged fiscal and financial positions since their downgrade on 15 June 2012. Although the three regions have reported stronger financial performances than other Moody’s-rated Spanish regions throughout the crisis, the rating agency notes that their income stream largely relies on state transfers and shared taxes with the sovereign, thus capping their ratings at the level of the sovereign rating.
— REGION OF VALENCIA
Moody’s decision to confirm Valencia’s B1 debt rating reflects the fact that the region’s high debt ratios and tight liquidity position are already reflected in the region’s non-investment-grade rating, currently the lowest amongst Moody’s-rated regions in Spain.
Valencia has a high level of amortisations remaining before December 2012, which, combined with its low cash on hand and extensive use of its credit line facilities, forced the region to request liquidity support from the sovereign through the FLA. This follows a request for financing support in December 2011, subsequent to the region’s difficulties in refinancing its retail bond maturing at that time. While Moody’s views the region’s consolidation efforts outlined in its restructuring plan positively, the region is likely to miss the deficit target of 1.5% of regional GDP in 2012.
WHAT COULD MOVE THE RATINGS UP/DOWN
A stabilisation of the outlooks or an upgrade of the ratings would require (1) the stabilisation or upgrade of the sovereign rating; and (2) successful plans from the regional administrations to restore their fiscal performances and reverse debt ratios.
Any further deterioration in the operating environment in Spain that would exert pressure on the sovereign rating would also have a negative impact on the ratings of Spanish sub-sovereigns. In addition, any sign of weakening government support would be a credit-negative factor. Finally, a failure of any individual sub-sovereign to progress towards fiscal consolidation targets would add pressure to that specific rating.
The ratings of the following five regions have been downgraded:
– Junta de Extremadura: long-term issuer rating downgraded by one notch to Ba1 from Baa3; negative outlook;
– Junta de Andalucia: long-term issuer and debt ratings downgraded by two notches to Ba2 from Baa3; negative outlook;
– Comunidad Autonoma de Murcia: long-term issuer and debt ratings downgraded by two notches to Ba3 from Ba1; negative outlook;
– Castilla-La Mancha: long-term issuer and debt ratings downgraded by one notch to Ba3 from Ba2; negative outlook;
– Catalunya: long-term issuer and debt ratings downgraded by two notches to Ba3 from Ba1; negative outlook; short-term rating affirmed at Not-Prime;
The ratings of the following regions or entities have been confirmed:
– Basque Country: long-term issuer and debt ratings confirmed at Baa2; negative outlook;
– Diputacion Foral de Bizkaia: long-term issuer rating confirmed at Baa2; negative outlook;
– Comunidad Autonoma de Madrid: long-term issuer rating confirmed at Baa3; negative outlook;
– Junta de Castilla y Leon: long-term issuer and debt ratings confirmed at Baa3; negative outlook;
– Comunidad Autonoma de Galicia: long-term issuer rating confirmed at Baa3; negative outlook;
– Region of Valencia: debt ratings confirmed at B1; negative outlook; short-term rating affirmed at Not-Prime;
– Instituto Valenciano de Finanzas: debt rating confirmed at B1, negative outlook, in line with Valencia’s ratings;
– Notes of CACSA and Universities of Valencia (Universidad de Valencia, Universidad de Alicante, Universidad Jaume 1 de Castellón and Universidad Politécnica de Valencia) confirmed at B1, negative outlook;
– Notes of Feria Valencia: underlying rating confirmed at B1, negative outlook (A and B Certificates).
The methodologies used in these ratings 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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Moody’s methodology for rating a security insured by a financial guarantor considers the higher of (i) the guarantor’s rating, and (ii) the underlying rating of the security.
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