OREANDA-NEWS. Fitch Ratings has affirmed the Metropolitan City of Milan's (MC of Milan) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and Short-Term Foreign Currency IDR at 'F2'. Milan's outstanding senior unsecured debt ratings have also been affirmed at 'BBB+'

The affirmation reflects Milan's wealthy economy, proactive management of operating performance, mainly driven by spending control, and the expected ongoing decrease in direct debt. The ratings also factor in the continued pressure from the national fiscal adjustment, which may further burden the operating revenue structure. The Stable Outlook reflects that on Italy (BBB+/Stable).

KEY RATING DRIVERS

Fiscal Performance

When adjusted for the main effects of the mandatory introduction of new accounting rules, the budget proved resilient to the pressures from the contribution to consolidate the national fiscal budget (EUR150m in 2015, and almost EUR200m expected in 2016). Operating performance improved to 15% from 10% in 2014, mainly driven by strict control of operating expenditure, more than offsetting the revenue curtailment. Fitch expects operating performance to hover at 10% in the medium term, on the back of progressive strengthening of the automobile industry, which accounts for 60% of operating revenues, combined with an ongoing commitment to streamlining the cost structure.

Fitch considers Fiscal Performance as Neutral for the MC of Milan.

Debt and Liquidity

We expect the debt policy to remain conservative, with stock heading below EUR600m by 2017 from EUR630m at end-2015 (average life of 14.4 years at 1.31% interest rate). Cash calls from capex are typically for extraordinary maintenance of roads and school facilities. These have been reduced from an average of EUR110m in 2011-2013 and new investments should average EUR30m in the medium term. They will continue to be largely self-funded through surplus and also rationalisation of the MC's real estate portfolio facilitated by central government agencies.

In addition to the possible use of the treasury lines and the sale of the EUR40m redeemable insurance, Fitch expects Milan to maintain a good cash position as a buffer in case of an unexpected liquidity shortfall. Liquidity was EUR180m at 2015 (net of a term deposit with the central bank for about EUR90m), covering 2015 debt service requirements by almost 4x.

Fitch considers debt and liquidity as Neutral for the MC of Milan.

Economy

Milan's sound economic fundamentals have proven resilient during a prolonged down cycle (local GDP grew by 1.0% in 2015 and are expected to outpace the national performance, allowing the local economy to maintain its wealthy indicators (GDP per capita around 50% above the EU29 average). Accordingly, we expect the unemployment rate to further improve from 8% in 2015 (12% nationally) in tandem with the employment rate further strengthening from the 67.5% (55.5% nationally).

Fitch considers the economy as strong for the MC of Milan.

RATING SENSITIVITIES

The MC of Milan's ratings are capped by the sovereign's. Therefore, an upgrade would be contingent on a similar action on the sovereign ratings, and provided that the MC continues to perform in line with Fitch's expectations.

Failure to record an 8%-11% operating balance in the medium term so to allow at least a 30%-50% coverage of the annual debt-servicing requirements, and/or unexpected growth of debt towards 200% of revenue could prompt a downgrade, as well as a sovereign downgrade.