Research Update:
Spain's Balearic Islands 'BBB-' Rating
Affirmed On Expectation Of Continued
Fiscal Consolidation; Outlook
Negative
Primary Credit Analyst:
Alejandro Rodriguez Anglada, Madrid (34) 91-788-7233;
[email protected]
Secondary Contact:
Ines Olondriz, Madrid (34) 91-788-7202; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Published Rating Factor Scores
Key Statistics
Key Sovereign Statistics
Related Criteria And Research
Ratings List
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Research Update:
Spain's Balearic Islands 'BBB-' Rating Affirmed On
Expectation Of Continued Fiscal Consolidation;
Outlook Negative
Overview
• We expect the Autonomous Community of the Balearic Islands will continue
reducing its deficits, with no meaningful deviations from fiscal targets,
and that the region will continue to have access to liquidity support
from the central government.
• The region has a very high debt burden and high deficits after capital
expenditures, but its economy is relatively strong for a Spanish region.
• We are affirming our 'BBB-' long-term rating on the Balearic Islands.
• The negative outlook reflects the possibility that the Balearic Islands
could fail to advance toward budgetary consolidation.
Rating Action
On Dec. 5, 2013, Standard & Poor's Ratings Services affirmed its 'BBB-'
long-term issuer credit rating on Spain's Autonomous Community of the Balearic
Islands. The outlook remains negative.
Rationale
The rating on the Balearic Islands mainly reflects our opinion of the
institutional framework for Spanish regions as "evolving but sound." The
Balearic Islands' relatively wealthy economy supports the rating, tempered by
our view of limited growth prospects for the region.
We consider the islands' budgetary flexibility as comparable with that of
other Spanish normal-status regions, with which it shares a common framework.
We also estimate that the Balearic Islands has moderate contingent liabilities
associated with the ongoing restructuring of its large sector of fully or
partially owned satellite companies.
We consider that the Balearic Island's negative budgetary performance
constrains the rating. We also view the islands' financial management as a
"negative" factor for the rating, reflecting its recent track record of
negative budgetary performance, with large deficits and deviations from
budgetary targets. In our view, the Balearic Islands' extremely high
tax-supported debt, and our view of its liquidity position as "negative" are
further constraints on the rating.
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Research Update: Spain's Balearic Islands 'BBB-' Rating Affirmed On Expectation Of Continued Fiscal
Consolidation; Outlook Negative
In 2012, the central government passed a new Budgetary Stability Law to induce
fiscal discipline after the revenue squeeze in 2008, that led regions to post
substantial deficits. With this law, the central government enhanced the
enforcement mechanisms to induce regional compliance with fiscal targets, and
strengthened its monitoring of regional finances. At the same time, the
central government provides substantial budgetary and financial support to all
normal-status regions, for which external financing had become increasingly
expensive and scarce. This supports our view of the institutional framework
for normal-status regions as "evolving but sound."
Spanish regions reduced their average deficit to 1.8% in 2012 from 3.4% of GDP
in 2011, coming close to the official target of 1.5% and in line with our
forecast. The Balearic Islands reduced its deficit significantly, to 1.8% in
2012 from 4.3% of regional GDP in 2011. While this performance fell short of
the 1.5% target, it was roughly in line with our expectations and close to the
average deficit of Spanish regions.
Following the EU's redefinition of deficit targets for Spain, the Spanish
government increased the 2013 average official deficit target for the regional
tier to 1.3% of GDP from 0.7%, and it set individual deficit targets for all
Spanish regions for the first time. The Balearic Islands' target--1.47% of
regional GDP--is higher than the average for Spanish regions. Deficit targets
for 2014, 2015, and 2016, respectively at 1.0%, 0.7%, and 0.2%, will again be
common for all regions. These new targets are higher than the previously
approved ones (0.1% in 2014 and a surplus of 0.2% in 2015), and consequently
regional fiscal consolidation will be more gradual.
Our base-case forecast reflects our expectation that the Balearic Islands will
continue to reduce its deficit, posting slight to moderate deviations from its
fiscal targets. We do not expect any meaningful contribution to budgetary
consolidation to come from revenue growth, but we think the Balearic Islands
will adjust expenditures to roughly comply with deficit targets.
In 2014 and 2015, we expect the Balearic Islands' economy and tax bases to
grow sluggishly, given our forecast for real GDP growth of 0.8% in 2014 and
1.2% in 2015. The Balearic Islands' is among Spain's more wealthy regions,
with GDP per capita at 107% of the Spanish average, based on data from INE,
the national statistics office. However, the region does not benefit fully
from this high relative wealth, as it is a net contributor to strong
equalization transfers in the Spanish public finance system. Consequently, we
expect modest growth in nominal terms in the islands' operating revenues:
about 0.3% in 2014 and 2% in 2015.
In our base case, we forecast that the Balearic Islands will contain growth in
operating expenditures, and gradually reduce capital expenditures by about 12%
on average in both 2014 and 2015. In our view, the Balearic Islands could
absorb some potential revenue shortfalls by making use of its budgetary
flexibility, which we consider to be similar to that of other Spanish
normal-status regions. For example, the Balearic Islands could raise rates on
the taxes over which it has regulatory leeway, or further reduce its
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Research Update: Spain's Balearic Islands 'BBB-' Rating Affirmed On Expectation Of Continued Fiscal
Consolidation; Outlook Negative
investments.
We now expect the Balearic Islands to post moderate operating deficits of
about 1.7% of operating revenues on average in 2013 and 2014. This is better
than our previous expectation of a deficit of about 6.5% between 2013 and
2014, mostly due to stronger operating expenditure cuts than we previously
expected, and to a lesser extent, slightly improved revenue prospects.
As a consequence of our improved expectations of operating deficits for the
Balearic Islands, we also expect budgetary deficits after investments. We now
expect deficits of about 10% in both 2013 and 2014, compared with our previous
estimate of 13 % on average between 2013 and 2014. In 2014, the Balearic
Islands must meet stricter deficit targets of 1% of regional GDP, after 1.47%
in 2013. However, we understand the islands will benefit from more favorable
national accounting adjustments in 2014 than in 2013, which will assist the
region in meeting this objective.
The continued deficits will push up the islands' already high tax-supported
debt, albeit at a slower pace than in previous years. We now expect the
Balearic Islands' tax-supported debt to reach 274% of consolidated operating
revenues by 2015, slightly above our previous estimate of 266%. This level
surpasses our highest debt benchmark. The change in our forecast for the
Balearic Islands' tax-supported debt follows its additional debt issuance in
2013 to clear supplier arrears in the framework of a new financial facility
sponsored by the central government. In our view, the increase in our
tax-supported debt estimates implies no additional risk on outstanding private
financial debt compared with previous levels, since the increase is entirely
due to debt owed to another administration.
Our rating on the Balearic Islands also reflects our assessment of its
financial management as "negative" under our criteria. We take into account
the islands' track record of budgetary deviations, as well as the size,
complexity, and poor performance of the the islands' public-sector companies.
We believe the Balearic Islands has moderate contingent liabilities arising
from the ongoing restructuring process of its satellite companies. We already
fully consolidate these companies' debt in our tax-supported debt for the
islands.
Liquidity
We consider the Balearic Islands' liquidity as "negative" for the rating,
based on our view of the islands' "very negative" debt service coverage ratio,
and "strong" access to external liquidity.
In our assessment of the region's debt service coverage ratio, we factor in
our estimate of the Balearic Islands' internal cash generation capacity and
available credit lines. Our main liquidity ratio (which reflects our base-case
scenario of average cash over the next 12 months and available credit lines)
covers about 15% of the islands' debt service for the next 12 months. We
estimate the regions' debt service for December 2013 to November 2014 at €941
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Research Update: Spain's Balearic Islands 'BBB-' Rating Affirmed On Expectation Of Continued Fiscal
Consolidation; Outlook Negative
million.
Our view of the Balearic Islands' "strong" access to external liquidity
encompasses that the central government is in a position to continue providing
the islands' with strong liquidity support through the Fondo de Liquidez
Autonómica (FLA). The government has earmarked FLA funding for regional debt
repayment and financing of the authorized deficits.
Outlook
The negative outlook on the Balearic Islands reflects the possibility that the
region may deviate from the deficit targets and therefore could fail to
advance toward budgetary consolidation, which would be in line with our
downside scenario. If this happens, we would likely adjust downward our view
of the Balearic Islands' budgetary flexibility if we thought that such
deviation resulted from the region's reluctance or inability to make
sufficient adjustments. This could prompt us to downgrade the Balearic Islands
by one notch.
We could affirm the rating on the Balearic Islands and revise the outlook to
stable within the next six months if we see that the islands' performance is
in line with our base case. Such performance would include gradually declining
budgetary deficits, stabilization in debt burden metrics, and a stable
liquidity position.
We see no rating upside potential at this stage.
Published Rating Factor Scores
Table 1
Autonomous Community of the Balearic Islands Summary Of Published Rating Factor Scores*
Rating factor
Score
Institutional framework
Evolving but sound
Financial management
Negative
Liquidity
Negative
*Standard & Poor's ratings on local and regional governments are based on, among other things, a scoring system that covers eight main rating
factors. We publish our scores for the three rating factors above.
Key Statistics
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Research Update: Spain's Balearic Islands 'BBB-' Rating Affirmed On Expectation Of Continued Fiscal
Consolidation; Outlook Negative
Table 2
Autonomous Community of the Balearic Islands Financial Statistics
--Financial year ending Dec. 31---Base-case scenario--
--Downside scenario--
(Mil. €)
2010a
2011a
201a2*
2013e
2014f
2015f
2013e
2014f
2015f
Operating revenues
2,523.0
2,200.3
2,601.6
2,674.4
2,682.9
2,732.4
2,584.3
2,626.1
2,641.7
-Operating expenditures
2,945.5
2,635.5
3,180.7
2,722.0
2,725.9
2,736.0
2,754.0
2,847.9
2,856.3
=Operating balance
(422.5)
(435.2)
(579.1)
(47.6)
(43.0)
(3.6)
(169.7)
(221.8)
(214.5)
Operating balance (% of
operating revenues)
(16.7)
(19.8)
(22.3)
(1.8)
(1.6)
(0.1)
(6.6)
(8.4)
(8.1)
+Capital revenues
145.2
165.3
51.2
130.4
113.0
90.0
129.9
70.0
70.0
-Capital expenditures
(capex)
671.3
483.0
557.8
406.0
355.2
315.2
406.9
291.0
266.0
= Balance after capex
(948.6)
(752.8)
(1,085.6)
(323.2)
(285.2)
(228.8)
(446.7)
(442.8)
(410.5)
Balance after capex (% of
total revenues)
(35.6)
(31.8)
(40.9)
(11.5)
(10.2)
(8.1)
(16.5)
(16.4)
(15.1)
71.1
214.8
482.8
487.9
766.7
764.1
487.6
767.1
783.2
(1,019.7)
(967.6)
(1,568.4)
(811.1)
(1,051.8)
(992.9)
(934.3)
(1,209.9)
(1,193.7)
(38.2)
(40.9)
(59.1)
(28.9)
(37.6)
(35.2)
(34.4)
(44.9)
(44.0)
555.4
565.2
1,668.8
1,337.4
1,051.8
992.9
1,362.6
1,209.9
1,193.7
(464.4)
(402.5)
100.4
526.2
0.0
0.0
428.3
0.0
0.0
Balance after borrowings (%
of total revenues)
(17.4)
(17.0)
3.8
18.8
0.0
0.0
15.8
0.0
0.0
Modifiable revenues as % of
adjusted operating revenues
48.1
55.6
58.4
49.9
51.0
51.0
48.2
49.6
49.7
Capex (% of total
expenditures)
18.6
15.5
14.9
13.0
11.5
10.3
12.9
9.3
8.5
3,338.8
3,686.8
4,992.6
5,842.1
6,127.2
6,356.0
5,867.7
6,310.4
6,721.0
132.3
167.6
191.9
218.4
228.4
232.6
227.0
240.3
254.4
3.3
5.6
8.9
9.4
9.8
10.0
10.2
11.5
12.2
5,367.3
5,681.7
6,868.9
7,379.0
7,536.5
7,727.2
7,404.6
7,719.7
8,092.1
206.4
247.8
255.1
266.9
271.6
273.5
276.8
284.0
295.9
6.1
15.3
27.5
27.6
38.4
37.9
29.1
40.7
41.9
-Debt repaid
= balance after debt
repayment and onlending
Balance after debt
repayment and onlending (%
of total revenues)
+Gross borrowings
= Balance after
borrowings
Direct debt (debt outstanding
at year-end)
Direct debt (% of operating
revenues)
Interest (% of operating
revenues)
Debt total tax supported
Tax-supported debt (% of
operating revenues)
Debt service (% of adjusted
operating revenues)
The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting
Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources
are the financial statements and budgets, as provided by the issuer. Base case reflects Standard & Poor's expectations of the most likely
scenario. Downside case represents some but not all aspects of Standard & Poor's scenarios that could be consistent with a downgrade. *2012
figures distorted by one-off adjustment due to the budgetary recognition of supplier debt from previous years. After correcting for this effect,
operating balance would be negative 7.0% of operating revenues and balance after capex would be negative 19.6% of total revenues. Debt
figures not affected by this adjustment. a--Actual. e--S&P estimate. f--S&P forecast.
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Research Update: Spain's Balearic Islands 'BBB-' Rating Affirmed On Expectation Of Continued Fiscal
Consolidation; Outlook Negative
Table 3
Autonomous Community of the Balearic Islands Economic Statistics
--Financial year ended Dec. 31--
Population (000s)*
Population growth (%)
2008
2009
2010
2011
2012
1,073
1,095
1,106
1,113
1,119
N.A.
2.1
1.0
0.6
0.6
Nominal GDP ( € 000´s)
27,138
26,162
25,964
26,633
26,767
GDP per capita (€)
25,634
24,337
24,039
24,378
24,393
N.A.
(3.6)
(1.4)
1.6
(0.3)
GDP (real) growth (%)
The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting
Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources typically
include national statistical offices, Eurostat, and Experian Limited. *Figures for Jan. 1. N.A.--Not available.
Key Sovereign Statistics
• Outlook On Spain Revised To Stable From Negative On Economic Rebalancing;
'BBB-/A-3' Ratings Affirmed, Nov. 29, 2013
Related Criteria And Research
Related Criteria
• Principles Of Credit Ratings, Feb. 16, 2011
• Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010
Related Research
• Outlook On Spain Revised To Stable From Negative On Economic Rebalancing;
'BBB-/A-3' Ratings Affirmed, Nov. 29, 2013
• Ratings On Spanish Regions Unchanged On Expected Liquidity Support Under
The 2014 Draft Budget, Oct. 3, 2013
• Spanish Regional Ratings Rely On Central Government Support Absent
Reforms To The Regional Financing System, June 19, 2013
• Spain's Autonomous Community of The Balearic Islands Affirmed At 'BBB-'
On Continued Fiscal Consolidation; Outlook Neg, May 31, 2013
• International Local And Regional Governments Default And Transition
Study: 2012 Saw Defaults Spike, March 28, 2013
• Institutional Framework Assessments For International Local And Regional
Governments, Jan. 14, 2013
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
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Research Update: Spain's Balearic Islands 'BBB-' Rating Affirmed On Expectation Of Continued Fiscal
Consolidation; Outlook Negative
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Ratings Affirmed
The Balearic Islands (Autonomous Community of)
Issuer Credit Rating
BBB-/Negative/-Senior Unsecured
BBBAdditional Contact:
International Public Finance Ratings Europe; [email protected]
Complete ratings information is available to subscribers of RatingsDirect at
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