OREANDA-NEWS. September 29, 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 at 'BBB+'.

The affirmation reflects Fitch's current expectation that Barcelona will continue to post strong operating performance and liquidity. The affirmation also reflects the city's moderate direct debt and expected growth of its strong economy over the medium term. The Stable Outlook factors in our expectation of a moderate reduction of direct debt in 2015, before stabilising through to 2017. The new executive is deliberating on the 2016 draft budget and Fitch will monitor its development.

KEY RATING DRIVERS
Strong and Improving Economy
Barcelona is the administrative, political and economic center of the region of Catalonia, concentrating 21% of the region's population. The city has a diversified and wealthy economy and benefits from important tourist activity. Its location in the Mediterranean allows Barcelona to become a dynamic port with important container traffic.

Its strong economy is also demonstrated by a higher-than-average employment rate of 67.6% in 4Q14 versus 49.9% nationally and a regional GDP per capita 18.5% above Spain's. The positive momentum in the local economy is also underscored by the total number of registered workers rising 2% in 4Q14 yoy and regional GDP growing 1.2% yoy in 2014, above the national 0.9%.

Strong Operating Performance
Barcelona's strong operating performance is largely driven by important transfers from the central government (43% of its operating revenues), and strong tax collection. The 2016 draft budget will be presented in October and Fitch will monitor any budgetary impact of implemented fiscal policies and key spending items. We currently expect the operating margin to remain strong for 2015-2016 (22.6% at end-2014). Barcelona's flexibility is driven by its tax autonomy as it can increase tax rates as well as update cadastral values over the medium term.

Barcelona's current balance was at EUR725.4m at end-2014, above the 2013's EUR592m, mostly due to EUR170m extra financial revenues and an increase in property tax, the main tax revenue for the city, as well as other collected taxes.

Moderate Direct Debt; Strong Liquidity
Fitch's base case scenario assumes direct debt will remain moderate close to 33%-34% of current revenue or EUR830m-EUR836m at end-2015, down from 37.2% or EUR971.6m in 2014, following a refinance in 2015 of EUR138m debt. Barcelona's direct debt has increased by EUR221.5m since 2009, increasing refinancing risk (as of end-July 2015, 49% of direct debt was to be repaid over the next three years).
Barcelona's liquidity position is stable and strong, representing 66% of its direct debt, meaning that no renewal of short-term credit lines or to application to the supplier fund mechanism has been necessary.

Change of Government and No Majority in the Municipal Council
After the local elections on 24 May 2015 the left wing party Barcelona en Comu formed a minority government, resulting in a fragmented city council political composition.

On 17 July 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 17 July 2015 at www.fitchratings.com)

RATING SENSITIVITIES
The Stable Outlook mirrors that on the sovereign's Long-term IDRs and the IDRs are constrained by the sovereign's. As a result Barcelona's ratings are sensitive to changes of the sovereign rating. A sovereign upgrade would likely result in an upgrade of the city's ratings, provided the city continues to post a strong operating performance and a moderate direct debt-to-current revenue ratio.

A significant deterioration in the fiscal performance in the 2016 draft budget with the current margin falling sharply below 5% (2014: 27.8%) and a sharp increase in direct debt would trigger a negative rating action. However, Fitch currently considers this scenario as highly unlikely. The rating on Barcelona could be placed on Watch Negative or downgraded if Catalonia declares independence unilaterally.