OREANDA-NEWS. Fitch Ratings has affirmed the City of Barcelona's (Barcelona) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F2'. The ratings on the senior unsecured outstanding bonds have also been affirmed at 'BBB+'.

The affirmation reflects Barcelona's strong operating performance and liquidity in 2015 and moderate direct debt, following reduction from 2014. The affirmation also reflects the city's strong economy. The Stable Outlook factors in our expectation that Barcelona will continue to post strong operating performance, and that direct debt will stabilise through to 2018.

KEY RATING DRIVERS
Strong Economy
Barcelona is the administrative, political and economic center of the Autonomous Community of Catalonia (BB/Negative/B), hosting 21.4% of the region's population in 2015. The city has a diversified and wealthy economy and benefits from strong tourist activity. Barcelona's seaport is a leader in Europe with the highest cruise passenger traffic in the Mediterranean and with significant containers traffic.

Its strong economy is demonstrated by a regional GDP per capita in 2014 that was 18.8% above the Spanish average and a higher-than-average employment rate of 51% in December 2015 (47% in Spain). In December 2015, the number of registered workers in the city was up 3.4% yoy.

Strong Operating Performance
Barcelona's strong operating performance is largely driven by large transfers from the central government (42% of operating revenue) and strong tax collection.

The 2016 draft budget presented by the new local government was not approved, resulting in the 2015 budget being extended into 2016. Under Fitch's base case scenario, Barcelona's operating margin is expected to remain strong at 16%-17% in 2016-2018 (21.1% at end-2015), in compliance with the fiscal target. The new local government will take advantage of its financial leeway to increase operating expenditure to between 3% and 5% in 2016-2018, largely on social spending. Barcelona's operating revenue should grow by a more moderate 1%-2% on average in 2016-2018, following an update of cadastral values and based on its scope for tax rate increases.

Barcelona's operating margin remained strong in 2015 at 21.1% (22.6% in 2014). Its current balance of EUR563.7m is below the 2014 level of EUR725.4m, due to a one-off recognition of EUR170m in financial revenues in 2014 and operating spending growth of 8% yoy.

Change of Government
Local elections in May 2015 saw the formation of a minority government by the left wing coalition party Barcelona en Comu, which resulted in a fragmented city council political composition. The new mayor is Ada Colau, who has a strong intention to comply with deficit and debt targets.

Moderate Direct Debt; Strong Liquidity
Direct debt remained moderate at EUR835.7m, or 32.2% of current revenue in 2015, down from EUR971.6m or 37.2% in 2014, following a refinance of EUR138m debt. For 2016, Fitch's base case scenario assumes direct debt will stabilise at close to 32%-34% of expected current revenue, well below the 75% debt target.

Pressure on debt servicing is fairly moderate, in particular with EUR331.7m debt maturing over the next three years, representing about 40% of outstanding direct debt at end-2015. Nevertheless, this is mitigated by the city's strong cash position of EUR631.2m at end-2015, which indicates a low 14% net overall risk to current revenue. Its strong cash position also means that no renewal of short-term credit lines was necessary in 2015, which we expect to continue in 2016.

RATING SENSITIVITIES
Barcelona's IDRs are constrained by the sovereign IDR and are sensitive to changes of the sovereign rating. An upgrade of the sovereign IDR would result in an upgrade of Barcelona's IDR, provided the city continues to post a strong operating performance and a moderate direct debt-to-current revenue ratio.

Although Fitch currently considers this scenario as highly unlikely, a sharp decline in the current margin below 5% (2015: 21.7%) and a sharp increase in direct debt would trigger a negative rating action on Barcelona's IDR. Barcelona's IDRs could be placed on Rating Watch Negative or downgraded in the event of a unilateral declaration of Catalonia's independence, which would weaken Barcelona's financial metrics.