OREANDA-NEWS. Fitch Ratings has affirmed the Italian City of Busto Arsizio's (BA) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' and its Short-term foreign currency IDR at 'F2'. The Outlook is Stable.

The affirmation factors in the city's stable budgetary performance, tight control over spending, and moderate debt burden. The ratings also reflect BA's sound liquidity position, wealthy socio-economic profile and its resilient revenue structure. BA's standalone profile remains constrained by Italy's IDR (BBB+/Stable) due to a lack of financial autonomy.

KEY RATING DRIVERS
Stable Operating Performance
Under Fitch's central scenario, the city's operating balance will stabilise at around 8% of operating revenue over the medium term, as ongoing results of measures against tax evasion, tight operating spending control and, if necessary, the city's budgetary leeway (around 13% of the budget) will offset declining transfers from the national government.

After the spike due to EXPO2015-related projects in 2015, Fitch forecasts total EUR16m new capital expenditure over 2016-2017, on roads and extraordinary buildings' maintenance. This will be mainly financed by own resources (asset sales and capital transfers).

Stable Debt, Solid Liquidity
In Fitch's central scenario, debt, which is fully amortising and euro-denominated, will stabilise at EUR27m in the medium term, and debt service requirements (about 7% of current revenue, as smoothed by derivative structure) will be covered by the current balance over the medium term. After several years of zero borrowing, Fitch assumes the city will partly fund investments through new borrowings for a total EUR8m in 2016-2017, which will offset repayments and therefore maintaining the stock of direct debt at about 40% of operating revenue.

BA's liquidity position, which cushions against possible temporary inflow/outflow mismatches, remained sound at about EUR20m at end-2015 (including about EUR4m deposited in a Treasury account for approved borrowings), and covering debt-servicing requirements by 3.3x.

Healthy Economy
BA maintains solid economic indicators, benefiting from its location in one of the most developed industrial and commercial areas of Italy. Local unemployment remains below the national level (12%) at around 8% at end-2015. Fitch expects GDP to have grown by 1% in 2015, sustained by tourist and commercial activities related to EXPO2015, and by the city's traditional sectors (chemicals, pharmaceuticals, machinery and transports), which continue to support its tax base.

Skilled and Prudent Management
BA's management has proved conservative, especially with regards to debt and liquidity. The long lasting aversion to new borrowing has helped maintain a limited debt burden with a payback at six years, and an adequate cash buffer (25% of the budget size) to offset contingent payment/collection mismatch.

Following the implementation of a new accounting system from 2015, the extraordinary revision of outstanding receivable and payable has led to re-calculate provisions for investments and difficult to collect receivables. Nevertheless, preliminary data shows that the city maintained free reserves at about 4% of current revenue at end-2015 against 6% at end-2014, buffering against unpredictable events.

Neutral Institutional Relations
Fitch considers intergovernmental relations as neutral for BA's ratings. Benefits from national state support, such as transfers and assistance in case of unexpected events, are offset by the city's contribution to Italy's consolidation efforts to balance the national accounts, by means of revenue curtailments.

RATING SENSITIVITIES
BA's ratings are capped by the sovereign. An upgrade of Italy's ratings would therefore lead to a similar rating action on BA, provided the city continues to perform in line with Fitch's projections.

Continued debt service (including principal repayment)/ operating balance ratio below 1x, as well as a substantial deterioration in economic conditions impacting budgetary performance, could prompt a downgrade. A downgrade of the sovereign would also be reflected by BA's ratings.