OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed the City of Madrid's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' with a Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F2' and all of City of Madrid's outstanding bond issues at 'BBB+'.

KEY RATING DRIVERS

The affirmation reflects the City of Madrid's strong economy, outstanding current margin and its decreasing albeit still significant debt. The ratings also reflect Fitch's expectations that the city will keep a strong financial performance and that it started deleveraging in 2014, a trend that will continue over the medium term.

In 2014, the city's finances followed the trend of strong performance previously experienced, fully overtaking a period of instability thanks to operating expenditure cuts of EUR500m over 2011-2014 and steady growth in tax and fee collection. The current balance improved to EUR1,498m (2011: EUR540.8m), so that the current margin strengthened to 31% (2011:12.9%), mostly due to the good performance of property tax, the main source of tax revenue, as well as the other local taxes. The city used the surplus generated in 2013 for the early repayment of EUR305m of debt, so it achieved a direct debt reduction of EUR1.1bn in 2014.

This solid fiscal track and the fact that it has complied with the fiscal adjustment plan set out in 2012 has allowed the 2015 budget to include fiscal reductions, notably the elimination of the waste collection fee and to bring forward the property tax reduction planned for 2016 which is offset by an enlargement of the taxable base. The non-reduced local and taxes fees have also been indexed to CPI for the coming years, instead of the previously planned 2% yearly increase.

The council has outlined a three-year budgetary scenario to comply with the Budgetary Stability Law requirements, factoring sustained revenues coupled with contained but steady increases in operating expenditure and a rebound in capex in 2016 - stabilising thereafter - after constant reductions since 2010.. It also records a EUR20m provision in 2015, EUR80m in 2016 and EUR20m in 2017 to ensure meeting the current balance goals. In its base case scenario, Fitch expects the current margin to decline slightly but to remain in the 18-20% range up to 2017.

In 2012 and 2013, Madrid took advantage of a national programme to convert short-term commercial liabilities into long-term financial debt (FFPP), which led to its debt increasing by almost EUR1.4bn. However, the EUR992m outstanding from the FFPP were refinanced in 2014 at a 1.51% rate (2.2% below the FFPP rate), in an operation involving several banks and reducing future interest expense by EUR92m. The city is now free of any state mechanism and Fitch considers this a financial strength.

Fitch expects Madrid's debt to continue declining sharply, mainly due to limited investments and high debt repayment. A total EUR735m redemption is expected at 2015-end, but additional early repayments stemming from the 2014 year surplus are very likely. Under our base case scenario we expect debt to fall to around EUR4.2bn in 2016, the equivalent of 100% of the city's current revenue (146% in 2013).

Fitch considers that as the political and economic capital of Spain (BBB+/Stable/F2), Madrid is less exposed to economic cycles than other cities in the country. It also has an economic profile well above the national average with an estimated GDP per capita around 170% of Spain. The city is taking advantage of Spain's good economic momentum, with GDP growth for 2015 estimated at around 2.5%. Its labour market is recovering faster than the national rate with an unemployment rate of 16.4% compared with 24.4% for Spain in 2014. Local elections are due on May 2015, and Fitch will monitor its impact on the management of the city.


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, depending on Fitch's assessment of the city's credit profile.

Any negative rating action of the sovereign would be reflected in Madrid's IDRs.