OREANDA-NEWS. Fitch Ratings has affirmed the Historical Territory of Alava's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F1'. Alava's senior unsecured bonds' ratings have also been affirmed at 'A'.

KEY RATING DRIVERS
The affirmation reflects Alava's solid socio-economic profile, its sound operating performance and its low direct debt. The ratings also take into account its prudent management.

Alava's socio economic indicators fared better than the national average. Alava is much wealthier than other provinces in Spain and the impact of the downturn was less severe, due to the lower contribution made by the construction sector, and much lower household indebtedness. Its labour market also fared better, with the downturn translating into a 9% drop in the total number of registered workers between January 2009 and January 2014, below Spain's 11% decrease. However, the number of registered workers at both the national and Alava level have since recovered.

Alava is the largest territory in the Basque Country (BBB+/Positive), accounting for 42% of its geographic area. Its population of approximately 321,417 inhabitants in 2013 is relatively small, and more than 75% is concentrated in its capital, Vitoria. In common with Northern Spain, 18.5% of its population is aged over 65. This equates to a high cost of social services.

Fitch expects Alava to continue to report a sound adjusted operating performance over 2015-16. Fitch expects the operating margin will remain in the 5.0%-5.2% range over 2015-2016, from an operating margin of 5.2% at end-2013, given the economic recovery. Alava has announced a fiscal reform which reduces the pressure on personal income tax (PIT) and corporate tax, which we do not expect to have adverse impact on the operating margin.

Alava reported a current balance of EUR91.7m in 2013 from EUR221.6m at end-2012. The 2015 draft budget has not been approved so the 2014 budget (current balance of EUR16.6m) has been rolled over into 2015.

During 2008-2013, there was some volatility in tax revenue, in part artificially created by a court decision on tax revenue return, within a general declining trend. This volatility had little impact on fiscal performance (except for 2010 and 2012), due to the unique funding system in the Basque Country and the importance of shared taxes between the provinces and the region. Consequently, the decline of tax revenue in Alava was largely compensated by lower operating expenditure. Once institutional transfers are deducted, Alava tends to generate strong operating performance with an operating balance equivalent to 19% of its adjusted current revenue in 2013.

In a context of declining tax revenue, and commitment to maintain its investment programme and co-funding to its municipalities, direct debt grew steeply to EUR477.5m in 2013 from EUR69m in 2007, representing 23.4% of current revenues (2.9% in 2007). Despite the increase in direct debt and the deterioration of its operating performance, Alava has until now managed to fully cover its debt repayment with the current balance generated. In the medium term, Fitch expect direct debt to continue rising modestly until 2015.

RATING SENSITIVITIES
An upgrade of the sovereign would be a condition for a positive rating action, since Alava is already two notches above the rating of Spain (BBB+/Stable/F2), the maximum allowed under current criteria.

A downgrade could stem from a substantial increase in direct debt, which would contribute to a deterioration of direct debt servicing coverage and an unexpected prolonged deterioration of the current balance. A downgrade of Spain would trigger a downgrade of Alava.