OREANDA-NEWS. Fitch Ratings has affirmed Pequenos y Medianos Astilleros, Sociedad de Reconversion SA's (Pymar) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB' and Short-Term Foreign Currency IDR at 'F3'. The Outlook on the Long-Term IDR is Stable.

The ratings were affirmed because no substantial change in the link with the sponsor, the Spanish government. The Outlook is Stable reflecting that of Spain.

KEY RATING DRIVERS
Fitch has applied its Public Sector Entity criteria for the rating because the entity plays a strong public role in and is strategically important to the development of Spain's shipbuilding industry. Pymar's ratings are therefore credit-linked with those of the Kingdom of Spain (BBB+/Stable/F2), but are notched down by one notch. Fitch has also factored into the rating potential support from Spain's autonomous communities, if needed, given the important role of Pymar in regional industrial activities.

The ratings take into account Pymar's key role in providing guarantees for the shipbuilding industry against its guarantee fund, Fondo Patrimonial de Garantias (FPG), which provides security to cover any potential losses. The total level of FPG guarantees outstanding fell to EUR44m at end-2014 from EUR908m at end-2009.

However, given the economic downturn, which had a severe impact on the industry and resulted in a large number of guarantees issued by Pymar being called, mainly between 2010 and 2012, Pymar has not issued any new guarantees against FPG. Pymar could issue new guarantees against a new fund, "Fondo de Garantias Navales", established by Pymar's wholly owned subsidiary, Pymaval Garantias, S.A.U., in 2012; Fondo de Garantias Navales has a stricter granting and limit criteria than FPG. The total amount of guarantees under the FGN is only EUR1m.

Pymar's shareholder base comprises 19 small and medium-sized private shipbuilders. The central government, despite not being a shareholder, is represented on Pymar's board of directors and executive committee, both of which lend considerable influence on decisions affecting the reconversion plans of the sector.

Activity in the sector dropped substantially, mainly as the old tax lease system had been investigated by the European Commission. However, the General Court of the European Union recently annulled the Commission's July 2013 decision against the former system of tax lease. The court confirmed that this system would not be considered as state aid, thus exempting investors from returning the fiscal benefits they had gained between 2007 and 2011. Furthermore, in 2012 a new tax lease system was approved by the Commission and ratified by the General Court. The new system has now been used in 21 operations worth a total of EUR480m; and we consider the prospects for shipyards' order books now brighter.

Spanish small- and medium-sized shipbuilders provide direct and indirect employment to about 87,000 persons.

RATING SENSITIVITIES
Pymar's ratings are credit-linked to those of the Spain's. Therefore, any rating action on the sovereign would be mirrored in Pymar's ratings.

An upgrade or downgrade could also follow if there is a change in Fitch's assessment of state extraordinary support.