OREANDA-NEWS. December 23, 2015. Fitch Ratings has affirmed the Autonomous Province of Trento's (PAT) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' and Short-term foreign currency IDR at 'F1'. The Outlook is Stable.

Fitch has also affirmed the EMTN programme for PAT, as follows:

-University of Trento's EUR43.7m amortising fixed-rate notes due in December 2015 (ISIN: IT0003976971): Long-term local currency rating affirmed at 'A-'
-Garda Trentino Fiere's (GDF) EUR15m bullet fixed-rate notes (now Patrimonio del Trentino's (PdT) notes following the incorporation of GDF into PDT in December 2011) due in 2016 (ISIN: IT0004051436): Long-term local currency rating affirmed at 'A-'
- PdT's EUR43m floating-rate bullet notes due in 2017 (ISIN: IT0005005456): Long-term local currency rating affirmed at 'A'

The affirmation reflects PAT's low debt, sound budgetary performance with an operating margin ranging around 30% and its prudent and skilled management, which is conducive to maintaining a solid and balanced budget.

KEY RATING DRIVERS
Institutional Framework (Neutral)
PAT is eligible to be rated above the sovereign by virtue of its institutional strength and high degree of financial autonomy. PAT's special autonomous status entitles it to receive fixed shares of major national taxes, ranging from 90% personal income tax (PIT) and corporate income tax (CIT) to 80% of VAT. This underpins the province's tax revenue resilience and limits dependence on state transfers. The diversified set of responsibilities supports budgetary flexibility. Contributions to national consolidation efforts are subject to bilateral agreements and from 2019 will account for about EUR400m, or 0.5% of Italy's interest burden. However, the leeway of the maximum two notches above the 'BBB+' sovereign rating captures possible interferences by the state in case of macroeconomic or financial stress of sovereign finances and subsequent risk of weakening predictability of intergovernmental relations.

Debt (Strength)
PAT is virtually debt-free, although Fitch reclassified the EUR1.5bn debt issued by Cassa del Trentino (CdT) as PAT's direct risk. However, this would be paid back with about one year's current balance, and is expected to remain within one-third of the province's current revenue. PAT is committed to maintaining total public sector debt below 10% of local GDP. The 2015 Stability Law allows the province to use reserves to pay off municipalities' and subsidiaries' financial debt, which is consequently expected to decline by about half of the EUR670m outstanding at end-2014.

Fiscal Performance (Strength):
Fitch expects PAT will maintain a high operating surplus of about 30% of revenue, or around EUR1.4bn, contributing to fully fund its capital expenditure, expected to amount to about annual EUR1.6bn in 2015-2016. Given that over 50% of capex are discretional, PAT has potential flexibility to maintain the balanced budget requirement by postponing investment projects if necessary. The balanced health care sector, representing about 40% of current spending, contributes to keeping costs under control.

Management (Strength)
PAT maintains a sophisticated and prudent budgetary policy with tight control of its municipalities' and subsidiaries' debt, while maintaining reserves around 8% of revenue, cushioning against unforeseen events.

Economy (Strength)
PAT is one of the wealthiest subnationals in Italy and Europe, as evidenced by GDP per capita at about 30% above the EU average and an employment rate of 67%. PAT's economy has proved resilient even during the recent adverse economic cycle, sustained by a well-diversified economy backed by strong exports. In 2015 signs of recovery emerged, from flat growth in 2014. This was mainly driven by tourism (up 5.3%) and export (up 4%) of machinery, transportation and agricultural products. Fitch expects PAT's GDP to grow by about 1% in 2016, with a stable unemployment rate at about 7%.

CREDIT-LINKED NOTES
The notes were issued against annual contributions granted by PAT to public sector entities pursuant to provincial law. The entities have mandated PAT, through a delegation of debt under Italian Civil Code rules, to retain the contributions and irrevocably use them to service the notes when due. With the acceptance of the debt delegation, PAT has undertaken a direct obligation towards the noteholders to pay principal and interest (within the limit of the contributions granted). A failure to do so would trigger the right of the noteholders to claim the amounts owed to them directly against the province without the need to request payments to the entities first. The province has undertaken an irrevocable 'impegno di spesa pluriennale' (multi-year fixed expense committement).

The debt delegation does not involve a discharge of the entities from their obligations under the notes. Therefore, should PAT fail to make any payments, the entities would still be bound to make payments under the notes.

PAT does not explicitly recognise the contributions granted to the entities, and hence the instalments payable to noteholders, as ranking equally with PAT's own direct debt obligations. In Fitch's view, this implies subordination of the notes to PAT's senior unsecured debt, with the exception of PdT's EUR43m floating-rate bullet notes due in 2017 (ISIN:IT0005005456) whose rating is equalised with that of PAT in light of an unconditional, irrevocable and first demand guarantee.

RATING SENSITIVITIES
Sovereign Trends
PAT's IDR moves in tandem with that of Italy due to the compression exerted by the sovereign ratings on PAT's standalone profile. A downgrade or upgrade of the Republic of Italy would likely therefore translate into a downgrade or upgrade of PAT.

Additional Rating Triggers
An upgrade to three notches above the sovereign from the current two could stem from a sustainable macroeconomic environment providing evidence of stability and therefore complete predictability of inter-governmental relations. A downgrade could be triggered by unfavourable changes in PAT's statute of autonomy or a substantial weakening of the financial profile of the province.