Jun
6
(The following statement was released by the rating agency)
June 06 –
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Summary analysis — Galicia (Autonomous Community of) ————- 06-Jun-2012
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CREDIT RATING: BBB+/Negative/A-2 Country: Spain
Primary SIC: Legislative
bodies
Mult. CUSIP6: E98110
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Credit Rating History:
Local currency Foreign currency
04-May-2012 BBB+/A-2 BBB+/A-2
30-Jan-2012 A/A-1 A/A-1
08-Nov-2010 AA-/A-1+ AA-/A-1+
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Rationale
Standard Poor’s Ratings Services bases its rating on the Spanish Autonomous
Community of Galicia on an “evolving but sound” institutional framework for
Spanish normal-status regions, according to its criteria. On the positive
side, our rating also reflects the region’s positive financial management the
lack of significant contingent liabilities.
Our view that the deterioration in Spain’s economy is further eroding the
long-term growth potential of major regional tax bases is also integral to the
rating. The rating also reflects worse-than-expected budgetary performances in
2011, and liquidity positions.
Following our downgrade of the Kingdom of Spain (BBB+/Negative/A-2) on April
27, 2012, we revised downward our view on the institutional framework for the
Spanish normal-status regions. We now believe the central government’s
capacity to provide support to the regions over the long run has weakened. On
the positive side, we acknowledge the central government’s current moves to
aid the regions’ fiscal consolidation. We think the new legislation is likely
to prompt the regions to make strong fiscal adjustments.
Spain has entered into what we see as a mild recession in 2012, and we
anticipate a period of sluggish economic activity over our forecast horizon,
2012-2014. In the same vein, we think that regional tax bases–which were
already hit by the 2009 recession–will likely continue to shrink in 2012, and
undergo a period of lackluster growth over 2012-2014.
We expect Galicia’s budgetary performance to slightly improve over the course
of our forecasting period (2012-2014), although at a slower pace than we
previously expected because we have revised downward our growth expectations
for the Spanish economy. We expect Galicia to be the only region with positive
operating balances on average. However, we think that Galicia will continue to
post deficits after capital expenditure just slightly below 10% of total
revenues on average. We estimate that Galicia’s tax-supported debt will not
exceed 120% by the end of 2014.
Although Galicia missed the deficit target in 2011–it posted a deficit of
1.61% of GDP versus the target 1.3%–it is the best performer among Spanish
regions. Galicia’s deficit declined to 1.61% of GDP in 2011 from 2.34% in 2010.
Under our criteria for rating local and regional governments (LRGs), an LRG
can be rated higher than its sovereign only if we believe that it exhibits
conditions described in detail in our criteria “Methodology: Rating A Regional
Or Local Government Higher Than Its Sovereign,” published Sept. 9, 2009. We
are currently of the view that Galicia does not meet these conditions.
Consequently, we cap the ratings on Galicia at the sovereign rating level.
Under our criteria, the “indicative credit level” (ICL) for Galicia is ‘a-‘.
The ICL is not a credit rating but a means we use to assess the intrinsic
creditworthiness of an LRG under the assumption that there is no sovereign
rating cap. The ICL results from the combination of our assessment of an LRG’s
individual credit profile and the institutional framework where it operates.
Liquidity
We assess Galicia’s liquidity position as “negative,” as defined by our
criteria.
Based on the latest available information, Galicia’s cash holdings and
available credit lines amount to EUR652 million. We estimate Galicia’s debt
service for the next 12 months (May 2012 to April 2013) at EUR762 million.
Moreover, we estimate that Galicia will have to finance a deficit after
capital accounts of about EUR998 million in 2012 (12.2% of total revenues).
Galicia has managed to raise about EUR510 million in the first quarter of 2012,
mainly from private placements.
We acknowledge that Galicia might benefit from additional sources of liquidity
and funding from the central government, if necessary. However, we do not
expect the region to make significant use of central government facilities,
given its ability to find external funding independently.
Outlook
The negative outlook on the long-term rating on Galicia reflects our negative
outlook on the long-term sovereign rating on the Kingdom of Spain. This is
because we rate Galicia at the same level as the long-term rating on Spain.
The negative outlook also reflects the risk that liquidity and funding support
mechanisms set up by the central government might not function as smoothly as
expected.
We could revise the outlook on Galicia to stable if we:
— Perceived that liquidity evolved in line with our current
expectations, on the back of functioning mechanisms of support from the
central government; and
— Revised the outlook on the long-term sovereign rating on Spain to
stable.
Related Criteria And Research
— Ratings On Seven Spanish Regions Lowered On Spain’s Weaker Credit
Quality; Valencia Affirmed At ‘BB’, May 4, 2012
— What’s Behind Our Downgrades Of Various Spanish Regional Governments,
May 4, 2012
— Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010
— Methodology: Rating A Regional Or Local Government Higher Than Its
Sovereign, Sept. 9, 2009
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