OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Valencia's (Valencia) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. The ratings on the senior unsecured outstanding bond issues have been affirmed at 'BBB-'.

The affirmation reflects no changes since the last review to the rating floor applying to Spanish autonomous communities. The Outlook is Stable and Fitch will monitor debates regarding state support after the general elections scheduled in December 2015.

KEY RATING DRIVERS
Valencia's ratings are based on Fitch's expectation of support from the Spanish government conducive to the application of the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the budgetary stability law and the recent law on commercial debt restraint; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and access to state support mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

Central Government Support
In Fitch's view, access to the FLA will continue to ensure timely debt servicing for Valencia. The region had received a total of EUR20.3bn (61.5% of total direct debt) through state support mechanisms by end-2014, illustrating strong support from the central government. The central government ratified its financial support on 23 December 2014, when the Ministry of Finance and Public Administration introduced further measures to ease the debt burden of autonomous communities within the FLA. For Valencia, this will result in roughly interest expense savings since 2014, of EUR621m for 2015 and EUR886m for 2016 on funds mostly contracted under the FLA and FFPP.

Valencia will receive a total of EUR7.9bn in 2015 from the state support mechanisms, expected to cover its borrowing needs for the year. Debt contracted under these instruments carry zero interest in 2015. In 2014, net overall risk rose by 16.7% to EUR36.5bn, and under Fitch's base case scenario, direct debt may increase to over EUR38bn-EUR40bn by 2016 or 350%-352% of its expected current revenues (EUR33bn or 318.3% in 2014). Valencia faces significant debt redemptions over 2015-17, but Fitch believes any refinancing risk will be mitigated by access to state support.

Weak Standalone Credit profile
Valencia's structural negative current balances since 2009, recurring overall budget deficits before debt repayment, high net overall risk and a weaker economic profile than Spain, mean that the region's standalone credit profile is weaker than its ratings indicate.

In 2014, Valencia's current balance was weak, at negative EUR2.6bn (or negative 25.6% current margin), and Fitch considers this will be difficult to reverse in the near to medium term, unless there is a significant change in the current funding system. Valencia received 20% less funding per capita in 2013 than the average of the 15 Spanish regions, under the common regime and the regional government is reliant on a reform of the funding system to address this disparity.

Valencia's operating expenditure per capita was estimated at EUR2,376.3 in 2014, 8.6% below the average of the 15 Spanish regions under the common regime, resulting from a series of cost-containment measures.

New Government, No Majority
At the regional elections on 24 May 2015, a coalition was formed between the socialist party Partido Socialista del Pais Valenciano (PSPV-PSOE) and the left party Compromis, after the centre-right wing party Partido Popular (PP) was in power in last mandate. This has resulted in a fragmented political composition, with new political orientations that might be translated into the 2016 draft budget's performance.

Regional Economy Recovering
With an estimated nominal GDP of EUR99.3bn, Valencia's economy grew by 1.5% in 2014 against 0.9% nationally. Fitch assumes that the regional economic recovery coupled with measures against the underground economy will contribute to improving the employment rate as well as increasing collected revenues. Valencia's socio-economic profile is weaker than the national average, with a GDP per capita 12% below the national level and an unemployment rate of 25.8% in 2014, above the national average (24.4%). In September 2015, job creations intensified (3.9% yoy), after as many 16.3% of jobs were lost between September 2008 and September 2014.

RATING SENSITIVITIES
Fitch will review the rating floor if state support measures are cancelled or if there is a reduction of the central government's ability and willingness to continue providing support to the regions. If the floor is removed, Valencia's rating is likely to be downgraded by more than two notches, unless it is able to report a structural positive current balance.