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 the ability of the city to tackle budgetary pressures in 2015 stemming from costs related to the World Exposition and to maintain a balanced budget with a sound liquidity position. The rating also reflects Milan's wealthy economy that sustains city's tax base.

The affirmation further reflects Fitch's expectation that Milan will maintain direct debt at around 150% of operating revenue in 2015-2017, along with continued satisfactory operating performance.

KEY RATING DRIVERS
Fiscal Performance: According to Fitch's central scenario, the city's operating balance will be around EUR300m, or 10% of operating revenue over the medium term, as rising property and waste collection taxes offset declining transfers from the national government. Nevertheless, also based on preliminary indications, Fitch believes that operating performance in 2015 will be impacted by higher operating costs (largely on transportation, environment and security) related to the World Expo (EUR2.6bn vs. EUR2.5bn in 2014). These will only be partially offset by increasing fines and tourist tax (up 35% yoy on 2014's EUR350m and 15% yoy on EUR35m) as well as an ad-hoc EUR60m state transfers to finance services enhancement during the six-month Expo.

Fitch believes that investments, only marginally debt-funded, will be modest in the medium term and average EUR300m annually, or 10% of total expenditure (down from 20% in 2011-2014), mainly focused on extraordinary maintenance, urban renovation and transportation.

Economy: Milan continues to maintain solid economic indicators, being located in one of the most developed industrial and commercial areas in Italy. Local unemployment rate stood at 8% at mid-2015, below national levels (12%), underpinning the city's solid tax revenue generation capacity. Fitch expects the city's GDP to grow 1% in 2015, mainly sustained by Expo-related tourist and commercial activities, and to maintain a positive trend in 2016, also due to national economic recovery of more than 1%.

Debt: Fitch expects Milan's stock of bonds and loans to remain below EUR4.2bn (excluding the sinking fund) over the medium term, as new debt will be matching principal repayment. In its central scenario, Fitch expects debt servicing to be 9.5% of operating revenue, or EUR270m on average in the medium term.
To ease the annual debt burden, the city is planning to convert by the end of next year about EUR400m debt into fixed from flexible interest rate. Fitch believes Milan's debt will remain sustainable in the medium term, with a debt-to-current balance of 25 years, above the average life of its debt of 20 years. Additional debt protection is provided by Milan's traditional solid liquidity, which amounted to about EUR800m on average in January-September 2015, covering debt service by 3x.

Management: Milan's administration approach is fairly prudent, as shown by a EUR2.3bn fund balance at end-2014, or close to 50% of operating revenue, almost entirely earmarked for investments and impaired receivables. The city makes annual provisions of about EUR200m for difficult-to-collect receivables, such as road fines and rents, thereby protecting its operating cash flows although, on the other hand, free reserves are close to zero and hence offer limited coverage for unexpected events.

Institutional Framework: Fitch considers inter-governmental relations as neutral toMilan's ratings. Despite the national government contributions to finance unexpected events or large projects, such as the World Expo in 2015, the city is exposed to the national policy of trimming its deficit and debt, by means of revenue curtailments or spending review, as Milan remains a net payer to municipalities' equalisation fund (EUR250m in 2014).

RATING SENSITIVITIES
A positive change of Italy's ratings/Outlook (BBB+/Stable) would lead to a similar rating action on Milan's IDRs/Outlook, provided that the city budgetary performance does not deteriorate.
Conversely, Milan's ratings would be downgraded if the sovereign rating is downgraded. Milan's ratings may also be downgraded if its operating margin weakens below 5%, or if its debt burden grows towards 200% of operating revenue, from 150% in 2014.