OREANDA-NEWS. January 19, 2016. Fitch Ratings has affirmed the Autonomous Community of Castile-La Mancha's (CLM) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB-'.

The affirmation reflects the unchanged rating floor being applied to Spanish autonomous communities. Fitch will monitor debate regarding liquidity support from the central government to Spanish regions.

KEY RATING DRIVERS
The ratings are supported by 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 controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and access to the state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

Central Government Support
The region had received a total of EUR8.8bn through state liquidity mechanisms at end-2015, illustrating strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years.

In Fitch's view, CLM's access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, which exceeded 25% of outstanding debt at end-2015. Funds contracted under state mechanisms represented 58% of direct debt (EUR12.9bn) at end-2014. Under Fitch's base case scenario, CLM's funding needs of EUR1.7bn in 2016 will mostly rely on the FLA. Expected improvement in the fiscal performance will slow debt increase, such that the debt-to-current balance ratio will not exceed 275% in 2016, compared with 268% in 2014, according to Fitch.

New Government
The regional elections held on May 2015 returned the PSOE (socialist party, centre-left wing) to power with a minority government. The 2016 budget has still not been drafted but is expected to increase social expenditure while keeping to the financial goals set by the Ministry of Finance and Public Administration (MinHap). Fitch will assess changes in fiscal policies and their impact on financial performance.

Weak but Improving Fiscal Result
CLM's negative current balances since 2008 and high debt burden mean that the region's standalone credit metrics are weaker than its ratings indicate. October preliminary results from the MinHap show CLM would have breached the 0.7% fiscal deficit goal in 2015, but still below 2014's 1.76%. The expected improvement versus 2014 is attributable to increased allocation from the funding system and a reduction of EUR200m of interest expense against the budget (after the last liquidity measures approved by the government), coupled with operating expenditure restraint. We estimate the current margin to have improved to close to minus 10% in 2015 from minus 15.4% in 2014.

Fitch expects further budgetary improvement in 2016, due to an additional EUR260m inflow stemming from higher allocations and a positive settlement from 2014, combined with operating spending control and a low debt burden.

Regional Economy in Recovery
CLM has a weaker economic profile than Spain, with a GDP per capita equivalent to 80% of the national average in 2014. Fitch expects nominal GDP to have grown more than 2% in 2015, slightly below the national rate, following annual declines since 2009. Nominal GDP in 2014 was EUR37.8bn. The labour market also improved as unemployment decreased to 24.7% in 3Q15 (Spain 21.2%), from 28.5% at end-2014. The region has a developed infrastructure transport network, which together with cheaper land cost, may attract new businesses or relocations from the Madrid area.

RATING SENSITIVITIES
As CLM's IDRs are supported by the 'BBB-' rating floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed..

KEY ASSUMPTIONS
Fitch assumes that the state will continue providing support to the Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are cancelled or if there is deterioration in the central government's ability and willingness to continue providing extraordinary support to the regions (see " Q&A on the Rating Floor for Spanish Regions" (December 2015) on www.fitchratings.com).