OREANDA-NEWS. March 30, 2015. Fitch Ratings has revised the Italian City of Busto Arsizio's Outlook to Stable from Negative. It has also affirmed the city's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' and its Short-term foreign currency IDR at 'F2'.

The revision of the Outlook follows the restoration of the city's operating balance to levels (8%) that fully cover debt servicing. The affirmation reflects the city's low debt levels and its wealthy socio-economic profile supporting a strong tax base.

KEY RATING DRIVERS

The rating action reflects the following rating drivers and their relative weights:

HIGH

Fiscal Performance: After a preliminary 2014 operating balance of EUR5.6m (or 8.5%), overshooting Fitch's estimates, we expect Busto Arsizio to continue recording a stable operating performance in the medium term. This is because forecast service fee growth and continued strict cost control will mitigate curtailment in national subsidies (EUR1.7m in 2015); the city can also tap its budgetary leeway (about 15% of budget), if need be. Fitch expects capital spending to focus on completing projects already started and extraordinary maintenance, and to dwindle to EUR8m annually over the medium term, or 30% below the average in 2009-2014.

MEDIUM

Debt and Liquidity: Busto Arsizio's direct debt fell to EUR27m at end-2014, or about 40% of current revenue, from EUR46m in 2011. In its baseline scenario, Fitch believes that the stock of debt will remain at current levels due to repayments matching new borrowing, raised to partially finance eventual new investments and extraordinary works should the internal stability pact be relaxed. Liquidity remained solid at about EUR18m at end-2014, representing 30% of revenue and covering debt service requirements by 3x.

Economy: Busto Arsizio's economy is supported by a dense network of export-oriented SMEs, in particular in manufacturing, which accounts for about 35% of local GDP, focused on metals (aeronautics, machinery), textiles and chemicals/pharmaceuticals. The city's wealth benefits from the proximity to the City of Milan and its Malpensa Airport, supporting employment (around 70%). Unemployment was around 8% in 2014, below the national average of about 13%. The city's labour force should benefit from tourism and commercial activities related to Milan's EXPO in May-October 2015, which should help foster GDP growth (we project 1% versus an almost stagnant 2014), supporting Busto Arsizio's tax base.

LOW
Management: Busto Arsizio has traditionally been led by a centre-right coalition, guaranteeing continuity to the city's policies. In addition to reducing tax evasion, the administration's main priorities continue to be the provision of a wide range of quality services, along with the reduction of financial debt. The city has managed to keep a balanced budget, while still preserving residual operating cost and budgetary flexibility (notably on PIT, waste collection rates and fees on services provided).

Institutional Framework: Busto Arsizio remains obliged in its contributions to Italy's efforts to balance the national accounts. In case of further transfer curtailments, the city can tap its fiscal autonomy that has been strengthened by reforms of the local fiscal framework, thus limiting adverse impact on its budget. Therefore, Fitch considers Italian inter-governmental relations as neutral to Busto Arsizio's ratings.

RATING SENSITIVITIES

Any positive rating action on Italy's ratings would lead to a similar rating action on Busto Arsizio, provided the city continues to perform in line with Fitch's projections.

Conversely, a debt service coverage ratio below 1x, as well as a substantial deterioration in economic conditions impacting budgetary performance could prompt a downgrade. Also a downgrade of the sovereign would be reflected on Busto Arsizio's ratings.