OREANDA-NEWS. Fitch Ratings has affirmed the Spanish Autonomous Community of Murcia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. Murcia's senior unsecured bond issues have been affirmed at 'BBB-'.

KEY RATING DRIVERS
The ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities. Despite the upgrade of Spain to 'BBB+' in April 2014, Fitch decided to leave the floor unchanged at 'BBB-'. The rating floor is based on a number of supporting factors that contribute to improving liquidity and reducing the likelihood of default by a region. These include the budgetary stability law and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; the Regional Liquidity Fund (FLA); and that negative tax settlements can now be paid over 20 years, easing liquidity.

As of December 2014, the region had received a total of EUR4bn from state support mechanisms, illustrating the strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is evenly repaid within 10 years. On 23 December 2014, the Ministry of Finance and Public Administration introduced further measures to ease liquidity for autonomous communities within the FLA, resulting in roughly EUR89m interest expense savings until end-2015 for Murcia on funds contracted under FLA and FFPP, according to the Ministry of the Finance and Public Administration.

Murcia's ratings reflect its structural fiscal deficit, with a negative current balance below 10% since 2010 and serious difficulties complying with fiscal targets. It also has a weaker economic profile than Spain, with a GDP per capita equivalent to the 81% of the national average. The ratings also take into account that the weak fiscal performance is leading to rising debt levels. Fitch expects negative current balances close to EUR400m over 2014-2015, so deficit goals of 1% and 0.7%, respectively, will be difficult to achieve.

Murcia's standalone credit metrics are weaker than its ratings would indicate. After the large deficits posted over 2010-2012, Fitch expects the deficit to continue to narrow provided that the economy keeps improving and the cost-containment policies remain in place. The 2015 budget includes operating expenditure virtually equal to 2013, and interest expense will decrease further than 2013 levels due to the central government liquidity measures. However, the regional accounts remain deeply burdened by the Regional Health Service performance, which has historically yielded annual deficits, close to EUR0.4bn over 2013-2014.

The region relies on a reform of the funding system to address this disparity, as Murcia received 13.3% less funding per inhabitant than the average for the 15 Spanish regions under the common regime in 2012. As Murcia did not comply with the deficit goal of 1.6% in 2013, the region had to present a rebalancing plan for 2014-2015.

In Fitch's view, Murcia's access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, equalling 37.8% of outstanding debt as of 31 December 2013. The funds contracted under state mechanisms were 56% of the direct debt (EUR5.1bn) on the same date. The region's FLA debt initial requirements in 2015 amount EUR1026n, including EUR388m of banking and bond amortisation. Given the expected weak fiscal performance, debt will continue increasing, so according to Fitch's base case scenario, debt-to-current revenue ratio will hover around 180% in 2015. The region completed a senior unsecured bond issuance of EUR50m with a nine-year maturity and 2.168% coupon in December 2014.

Murcia's socio-economic profile is weaker than the national average, with an unemployment rate of 26.6% (2.2% higher than in Spain) in 2014. However, the employment rate improved in 2014 by 1.2%, up to 44.8%, almost replicating the national level at 45%. Registered workers also increased in 2014, recovering by 3.8%, above the 2.4% national rate. The GDP outcome for 2014 will be in line with Spain's 1.3%, and Fitch expects Murcia to replicate at least national GDP growth in 2015.

RATING SENSITIVITIES
Fitch will review the rating floor if state support measures are cancelled or if there is a reduction in the central government's ability and willingness to continue providing extraordinary support to the regions. If the floor is removed, Murcia's rating would likely be downgraded by at least two notches, unless it is able to report a structural positive current balance.