OREANDA-NEWS. Fitch Ratings has affirmed the Italian City of Busto Arsizio's (BA) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+' and its Short-Term Foreign Currency IDR at 'F2'. The Outlook is Stable.

The affirmation factors in the city's moderate debt burden and the stable budgetary performance, amid the implementation of new accounting rules. The ratings further take into account BA's sound liquidity position, wealthy socio-economic profile and underpinning tax base.

BA's standalone profile remains constrained by Italy's IDR due to a lack of financial autonomy.

KEY RATING DRIVERS

Stable Operating Performance: BA posted a solid operating performance with an operating margin at 12% of revenue, or EUR8m at end-2015, net of difficult to collect revenue and costs financed by earmarked resources, sustained by a solid tax base and continued control on costs. Fitch forecasts the operating margin will remain around a stable 8% over the medium term, as ongoing results of measures against tax evasion, tight operating spending control and, if necessary, the city's budgetary leeway (around 13% of the budget) will help offset declining transfers from the national government and increasing staff costs.

Stable Debt, Solid Liquidity: BA's direct debt is fully amortising and euro denominated. It was EUR25.6bn at end-2015 or about a moderate 35% of operating revenue, with debt service requirements (about 7% of current revenue) totally covered by the current balance (1.5x). In Fitch's central scenario, the stock of debt will stabilise at one-third of the budget in the medium term, with a payback around five years, roughly half the average maturity.

BA's liquidity position remained sound at about EUR20m at end-2015 (including about EUR4m deposited in a treasury account for approved borrowings), cushioning against possible temporary inflow/outflow mismatches and covering debt servicing requirements by 4x.

Solid Economy: BA is a medium-size city in the region of Lombardy with about 83,000 inhabitants. It maintains solid economic indicators, benefiting from its location in one of the most developed industrial and commercial areas of Italy, in the immediate vicinity of the city of Milan (BBB+/Stable). Local unemployment remains below the national level at around 8% at end-2015 (12% nationally). Fitch expects GDP to grow nearly 1% in 2016, on the back of 2015's positive trend, sustained by tourism and commercial activities, in addition to the city's traditional sectors (chemicals, pharmaceuticals, machinery and transports), which continue to underpin the tax base.

Recently Elected Management: New administration policies (elections in June 2016) may influence the next investment cycle, but Fitch forecasts capital spending to range between EUR25m-EUR30m over 2016-2018, mainly relating to extraordinary urban maintenance. This will be mostly financed by capital transfers and funds. Following the implementation of a new accounting system from 2015, the city's fund balance of about EUR30m (40% of operating revenue) in 2015 was almost entirely earmarked for investments and impaired receivables, while free reserves stood at a low 1% of the budget or about EUR0.5m in 2015.

Neutral Institutional Relations: Fitch considers intergovernmental relations as neutral for BA's ratings. Despite the national government support, such as transfers and assistance in case of unexpected events, the city is exposed to the national policy of trimming the national deficit and debt through revenue curtailments.

RATING SENSITIVITIES

BA's ratings are capped by the sovereign. An upgrade of Italy's ratings (BBB+/Stable) would therefore lead to similar rating action on BA, provided the city continues to perform in line with Fitch's projections.

A continued debt service (including principal repayment)/ operating balance ratio below 1x, as well as a substantial deterioration in economic conditions impacting budgetary performance, could prompt a downgrade. A downgrade of the sovereign would also be reflected on BA's ratings.