OREANDA-NEWS. September 29, 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 Madrid's Short-term foreign currency IDR at 'F2' and outstanding bonds at 'BBB+'.

The affirmation reflects the City of Madrid's strong economy, sound current margin and its declining but still significant debt. Fitch expects the city to maintain adequate financial performance and continue deleveraging over the medium term, even in a scenario of additional spending policies. Despite uncertainties stemming from political changes after the latest elections - in particular the in-house debt audit - the Outlook remains Stable, until further developments. The 2016 budget draft is expected shortly, and Fitch will assess the impact of any new fiscal policies on future budgetary performance.

KEY RATING DRIVERS

New Management
The city's council is governed by the left-wing, new contender party Ahora Madrid following elections on 24 May 2015. The new government started an in-house debt audit in August, reportedly aimed at analysing the burden and return generated by the outstanding liabilities of the council.

Fitch will closely monitor its development but believes that this initiative will not compromise the city's debt servicing during 2015-2016. Ahora Madrid's minority government in the local assembly means it would need to reach agreement with at least one party before any decision is made, including on debt policies or the budget approval.

Strong Performance
The city extended its strong performance in 2014 with an improvement in its current balance to EUR1,498m (2011: EUR540.8m), taking the current margin to 31% (2011:12.9%). In 2013 the city generated a budget surplus which it used for the early repayment of EUR305m of debt.

Budgetary Changes Expected
A restructuring of property tax rates by taxpayer type has been envisaged by the new administration but Fitch does not expect this to affect the total collection of the levy. Waste collection, street cleaning, and gardening services are currently outsourced but some of these services may eventually return to the council. Fitch will monitor the budgetary impact of any change in such policies, and expects the current margin to remain strong up to 2016.

Moderately High but Declining Debt
Fitch expects Madrid's debt to continue declining sharply. Under our base case scenario we expect debt to fall to EUR4.6bn in 2015, close to 100% of the city's current revenue (146% in 2013).

Strong Economic Profile
Madrid is the political and economic capital of Spain (BBB+/Stable/F2), and has an economic profile well above the national average with an estimated GDP per capita around 170% of Spain.

RATING SENSITIVITIES
Madrid's intrinsic credit profile could benefit from a continued decline in debt. Conversely, the ratings could suffer from a sharp deterioration of budgetary performance.

Although Madrid's intrinsic credit profile is well above the sovereign's its IDRs are constrained by the sovereign IDRs and are sensitive to changes of the sovereign rating.