Fitch Affirms Metropolitan City of Milan at 'BBB '; Stable Outlook
KEY RATING DRIVERS
Milan's ratings reflect Fitch's expectation of satisfactory operating performance, supported by a wealthy economy and tight spending control, as well as by likely continued efforts to maintain a close to balanced budget despite pressure stemming from national fiscal adjustment.
According to preliminary 2014 figures, Milan recorded a solid 11% operating performance and is expected to start trending towards 10% in the medium term, after a forecast decline in 2015 due to contributions to consolidate the national fiscal budget and revenue curtailment. The improvement in operating performance will be driven by an expected recovery of the automobile sector, on which Milan's taxes are reliant, as well as by potential new taxes, such as a levy on airport transits.
Upon the adoption of its new status in early 2015, the metropolitan city has taken on all assets and liabilities pertaining to the old province of Milan, and is witnessing a small change to its mix of revenue and spending responsibilities. Although the revenue/spending mix is not yet finalised, Fitch expects that the budget will not suffer major changes, amid continued efforts by management to maintain a close to balanced budget.
With new responsibilities relating to additional inter-municipal services, Fitch expects investments will continue to be focused largely on roads and school networks, albeit commensurate with available resources and therefore mainly relating to non-deferrable extraordinary maintenance (EUR30m-EUR50m per year). To finance this investment plan, Fitch forecast new borrowing totalling EUR30m in the medium term to complement Milan's asset disposal plan. Nevertheless, we expect debt to continue decreasing, trending towards EUR600m by 2017 from EUR710 at end-2012, as repayments outpace new borrowings.
We expect Milan to maintain its solid cash position, due to high collection rates on taxes and fees, of EUR130m (net of term deposit with the central bank for EUR110m). This covers 2015 debt service requirements by 2.5x. Liquidity is supplemented by the potential disposal of financial assets (insurance policies promptly redeemable amounting to approximately EUR50m) and/or use of treasury lines, which represent a buffer in case of unexpected liquidity shortfall.
Despite economic stagnation in 2014, the metropolitan city's employment rate remained stable at 67% (Italy: 56%) and unemployment at 8% (Italy: 13%), allowing the local economy to maintain its wealthy indicators (GDP per capita around 50% above the EU28 average) and its solid tax revenue generation capacity. We expect the latter to benefit from a recovering auto sector.
RATING SENSITIVITIES
An upgrade would be contingent on a similar action on the sovereign ratings, and provided that the metropolitan city continues to perform in line with Fitch's expectations.
A downgrade would result from failure to control spending under the new metropolitan city framework, translating into debt service coverage consistently below 1x, or from a sovereign downgrade.
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