OREANDA-NEWS. 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, including CLM. Fitch will monitor debate regarding liquidity support from the central government to Spanish regions.

KEY RATING DRIVERS

Support Rating Floor

CLM's 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 state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

We expect the region to hold EUR9.8bn debt from state liquidity mechanisms at end-2016, around 70% of its total debt, 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. Redemptions in 2015 exceeded 25% of outstanding debt. In 2016 support from FLA has been delayed by the implementation of reinforced monitoring and fiscal discipline from the Ministry of Finance and Public Administration (MinHap) over Spanish regions. Additionally, allocations of funding are now made on a quarterly basis, rather than annually, at formal requests from the regions.

Under Fitch's base case scenario, CLM's funding needs of EUR1.7bn in 2016 will rely on the FLA. Expected improvement in the fiscal performance will slow down debt increase, and higher expected operating revenues may result in a decline of the debt-to-current revenue ratio in 2016, from 290% in 2015.

Worse-Than-Expected 2015 Performance

Negative current balances since 2008 and a high debt burden mean that the standalone credit metrics of CLM are weaker than its ratings indicate. The region's 2015 preliminary results showed a negative current margin of 14.6% and, while better than the negative 17.7% posted in 2014, it was still below Fitch's expectations. This was driven by EUR0.3bn lower-than-budgeted current transfers and taxes, while operating expenditure was unchanged at EUR5bn.

Slight Fiscal Improvement Ahead

Fitch expects an improvement to fiscal performance in 2016, due to an additional EUR260m inflow stemming from higher funding allocations and a positive settlement from 2014, as well as a lower debt burden.

The 2016 budget, which was passed in April, forecasts operating expenditure to grow above 9% yoy, after a 32.2% decline over 2011-2015. However, Fitch believes this may be revised lower over the course of the year to meet the fiscal deficit goal of 0.7% in 2016, after MinHap's stricter enforcement of the Budgetary Stability Law. We estimate the current margin will improve to around negative 10% in 2016, from a negative 14.6% in 2015.

Regional Economy in Recovery

CLM has a weaker economic profile than Spain, with a GDP per capita equivalent to 79% of the national average in 2015. Fitch expects nominal GDP to grow nearly 3% in 2016, although slightly below the national rate, after 3.4% in 2015. The labour market has also improved as unemployment decreased to 26.3% in 2015 (Spain 22.1%), from 28.5% in 2014. The region holds economic potential, based on its developed infrastructure transport network and cheap land cost, which may attract businesses 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 Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are withdrawn or if the central government's ability and willingness to continue providing extraordinary support to the regions deteriorates.