OREANDA-NEWS. Fitch Ratings has affirmed the City of Milan's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' and its Short-term foreign currency IDR at 'F2'. The Outlook is Stable.

The affirmation reflects Fitch's expectations that the city will be able to absorb extra spending for the 2015 World EXPO, due to about EUR100m ad-hoc national government transfers and extraordinary dividends from subsidiaries, in addition to a solid tax base. The affirmation also considers Milan's sound liquidity position and the wealthy economy.

KEY RATING DRIVERS

Fiscal Performance: According to preliminary 2014 figures, Milan recorded an adjusted operating margin of 10%, in line with our medium term projections, as rising property and tourist taxes offset declining transfers from the national government. With projects for the upcoming EXPO largely completed in 2015, Milan's investments are expected to average EUR350m, or 10% of total spending over the medium term, largely sized to match capital transfers and proceeds from sales of assets, including minority stakes in municipal companies. Borrowing for capital spending (on environment, urban renovation and transportation) that is commensurate to principal repayment will be conducive to achieving a balanced budget.
Economy: Milan is one of the major European financial hubs, with GDP per capita around 50% above the EU average and unemployment rate at a moderate 8% (Italy: 13%), underpinning its solid tax revenue generation capacity. Milan's diversified economy attracts foreign workers and will benefit from tourism and commercial activities related to 2015 EXPO; Fitch expects that the event would boost GDP growth by 1% in 2015.

Debt: According to preliminary figures, Milan's direct debt stood at EUR4.1bn at end-2014 (net of sinking fund), in line with Fitch's 2014-2016 expectations. We forecast that it will remain close to 1.5x operating revenue, with new loans funding up to 50% of investments. The long average life of debt of about 18 years underpins debt sustainability although Fitch estimates a debt-to-current balance ratio of almost 30 years. Fitch expects Milan to maintain its solid cash position or roughly EUR0.5bn, covering debt service requirements by almost 2x.

Management: Milan is at the forefront of the implementation of a new accounting system aimed at strengthening reporting, including the removal of pro-forma components from liabilities. Milan's large fund balance of about EUR2.3bn, or close to 70% of operating revenue, is largely earmarked for investment and impaired receivables, leaving free reserves fairly low at about 1% of current revenue.

Institutional Framework: Fitch considers inter-governmental relations as neutral for Milan. On the one hand the national government contributes to finance large projects such as the EXPO, or unanticipated events. On the other hand the city remains exposed to the national policy of cutting down deficit and debt and is a net payer to municipalities' equalisation fund. The city contributes about EUR250m to, or 5% of the equalisation fund's total amount while its population only accounts for 3% of the country's total. A new local tax which, from 2016, could combine property, PIT surcharge and other minor taxes, could account for about 70% of Milan's revenue, making it almost self-supporting when the waste collection tax is also added.

RATING SENSITIVITIES

Milan's ratings may be downgraded if the operating margin weakens towards 5%, or debt burden grows towards 200% of its operating revenue (2014: 150%).