OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed the Metropolitan City of Milan's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' and Short-term foreign currency IDR at 'F2'. The Outlooks are Stable. Milan's outstanding senior unsecured debt ratings have also been affirmed at 'BBB+'.

The affirmation reflects Milan's continued satisfactory operating performance, its wealthy economy and spending control, along with high liquidity and an expected decrease in direct debt. The ratings also take into consideration the continued pressure stemming from national fiscal adjustment.

KEY RATING DRIVERS
Fiscal Performance
Milan recorded a satisfactory 9.5% operating performance in 2014, which is expected to stabilise in the medium term after a forecast decline in 2015. The revision of the expected margin is mostly due to higher contributions to consolidate the national fiscal budget and, to a lesser extent, revenue curtailment. Fitch believes the operating performance will strengthen thereafter mainly thanks to a recovery in the automobile industry, which 60% of operating revenue is linked to, in tandem with the reduction in staff costs following the reallocation of some responsibilities to the region and the municipality.

Institutional Framework
Despite the adoption of its new status in early 2015, the mix of revenue and spending responsibilities have so far only marginally changed, as new responsibilities relate to additional inter-municipal services. Although not factored into Fitch's central scenario, an additional boost to the metropolitan city's revenue structure could be provided if new taxes are introduced (such as a levy on airport transits).

Debt and Liquidity
In its central scenario, Fitch forecasts EUR30m total new borrowing in the medium term. However, debt is expected to continue decreasing and trend towards EUR600m by 2017 from EUR650 at end-2014, as repayments outpace new borrowings. Therefore, despite being downsized to a yearly EUR30m (from an average of EUR110m in 2011-2013), investments will likely continue to be largely self-funded and used for extraordinary maintenance of roads and school networks.

We expect Milan to maintain its solid cash position, due to high collection rates on taxes and fees, of EUR130m at 2014 (net of a term deposit with the central bank for EUR110m). This covers 2015 debt service requirements by nearly 2.5x. Moreover, the potential disposal of financial assets (insurance policies promptly redeemable amounting to approximately EUR50m) and/or use of treasury lines represent a buffer in case of unexpected liquidity shortfall.

Economy
Thanks to the expected 1.0% GDP growth in 2015, Fitch believes that Milan will maintain its solid tax revenue generation capacity and take advantage of a rebounding auto sector, which is already showing signs of recovery. Milan's sound economic fundamentals have proven resilient during a prolonged down cycle. Despite economic stagnation in 2014 and recession since 2012, 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 EU29 average).

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.

Failure to bolster the operating balance towards 10% under the new metropolitan city framework to largely cover the annual debt-servicing requirements, and/or unexpected growth of debt towards 200% of revenue could prompt a downgrade, as well as a sovereign downgrade.