OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed the City of Barcelona's (Barcelona) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F2'. The ratings on the senior unsecured outstanding bond issues have also been affirmed.

KEY RATING DRIVERS
Barcelona's ratings reflect its strong operating margin, moderate direct debt and its strong socio-economic profile. The ratings also reflect Fitch's expectations that the city will maintain a strong operating performance and stabilise its direct debt in the medium term.

With 1.6 million inhabitants, Barcelona is the administrative, political and economic centre of the region of Catalonia (BBB-/RWN/F3) and receives a high 43% of its operating revenues from the central government, in the form of transfers. The funding system of municipalities is decided by the central government, as well as prudential borrowing and fiscal targets, while the supervision and financial monitoring is performed by the regional government.

In January 2015, Fitch decided to maintain the Rating Watch Negative (RWN) on Catalonia's ratings as political uncertainties in the region and over the relationships between the region and the central government persisted. (See "Fitch Maintains Autonomous Community of Catalonia on RWN" published on 23th January 2015 at www.fitchratings.com.).

Fitch expects the operating margin to remain around the 20%-21% range in 2016, from an estimated operating margin of 22.6% at end-2014. In addition the city could increase tax rates within its tax autonomy as well as update cadastral values in the medium term. Barcelona has reported a current balance at EUR725.4m at end-2014, above the EUR592m posted at end-2013, mostly thanks to EUR170m extra financial revenues.

Fitch's base case scenario assumes direct debt will remain moderate until 2016 at 39%-41% of current revenue. Barcelona's liquidity position is strong, representing 66% of its direct debt, which means that it has not needed to use short-term credit lines or to apply to the supplier fund mechanism. Direct debt has increased by EUR221.5bn since 2009, increasing refinancing risk (51% of direct debt repayment over the next three years at end-2014). Direct debt represents a moderate 37.2% of current revenue in 2014, which was lower than in 2013 (45.3%), as the city has used the surplus generated in 2013 to repay debt.

Barcelona's economic strength is demonstrated by its socio-economic indicators, which are above the national average. Its regional GDP per capita was estimated to be 18% above the national average in 2013 and its unemployment rate in 2014 was 20.3%, much lower than the national average of 24.4%. The city is an important tourist destination, with overnight stays having grown by 6% since December 2013.

RATING SENSITIVITIES
The Stable Outlook mirrors that on the sovereign's Long-term IDRs. A sovereign upgrade would likely result in an upgrade of the city's ratings, if the city continues to post a strong operating performance and healthy debt ratios.

Any negative rating action on the sovereign would be reflected by Barcelona's IDRs. Barcelona's ratings could be downgraded if its current balance falls sharply to a level below EUR50m, however Fitch currently considers this very unlikely. Fitch would place Barcelona on RWN in the event Catalonia would unilaterally declare independence.