OREANDA-NEWS. Fitch Ratings has affirmed the Italian City of Turin's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and its Short-term foreign currency IDR at 'F3'. The Outlook is Stable.

The rating action affects Turin's senior unsecured debt, including a bond of nominal EUR355m at issue (XS0373247104).

The affirmation reflects Fitch's expectation that Turin will maintain sound operating performance, mainly due to its tight cost control matching rigid revenue, preserving a balanced budget in the medium term. The current rating level incorporates the city's fairly high level of debt, which Fitch expects to remain at around 260% of the budget in the medium term.

KEY RATING DRIVERS

Debt: Contrary to the city's forecasts of declining trends, Fitch believes Turin's debt will stabilise at around EUR3.4bn in the medium term, as new borrowings - to partially finance investments - will equal principal repayment. This will help stabilise the debt-to-current balance at around 45 years in the medium term, about twice the average life of its debt.

According to Fitch's adjusted figures, debt includes around EUR500m of state-subsidised borrowing in 2013-2015 from Cassa Depositi and Prestiti (BBB+/Stable) to pay down commercial liabilities. Also, the stock of debt excludes loans subsidised by the national government (about EUR100m in 2015), and the EUR200m treasury bank line drawdown in 2015 to offset temporary collection/payment mismatch; Fitch expects such advances from the treasury bank to total about EUR100m annually over the medium term,.

Fiscal Performance: According to Fitch central scenario, the city's operating balance will be around EUR200m, or 15% of operating revenue in the medium term, down from 20% recorded in 2013-2014 but covering almost entirely the city's debt service requirements. Despite modest budgetary flexibility, affected also by weak tax and fee collection rates (around 90%), Fitch expects current revenue to stabilise at EUR1.3bn as marginal increases in tax and fees will offset curtailment in national subsidies.

Fitch expects the city to maintain its tight grip on operating spending, which fell 3% in 2011-2014. Due to limited capital expenditure in past years, Fitch expects Turin will implement a new investment cycle, representing annual EUR200m or 15% of its budget (up from 10% on average in 2012-2014).

Management: Following an extraordinary revision of outstanding 2014 receivables and payables, an unexpected EUR340m fund balance deficit emerged, to be refunded in 30 years, as allowed by law. Other than marginally eroding the still solid operating balance, Fitch believes that the city administration will address the budgetary pressures through additional cost curtailment.

Economy: GDP per capita is about 110% of Italy's and unemployment rate is in line with the national rate at 12%. Fitch expects local GDP will grow 0.5% in 2015, underpinning the city's tax base, mainly sustained by industry (transportation) and services (tourism). The growth trend should continue in 2016, also due to economic recovery at the national level.

Institutional Framework: Fitch considers inter-governmental relations as neutral to Turin. While the national government contributes to financing unexpected events or large projects, the city is exposed to the national policy of trimming its deficit and debt, by means of revenue curtailments or spending review. In the meantime timely payment of debt service remains reliant on preferential payments allowed by Italian legislation, given Turin's tight liquidity.

RATING SENSITIVITIES
Turin's ratings could be downgraded if the operating margin weakens below 10%, and if overall long-term debt, including subsidised loans to pay commercial liabilities, climbs towards EUR3.5bn.

Turin's ratings could be upgraded if the city manages a solid and persistent fiscal performance, including overcoming the fund balance deficit, and reducing its financial debt stock on a sustained basis, with the debt-to current balance ratio trending towards 25 years.