Thursday, June 10, 2010

Standard & Poor's: -downgraded Spain's region of Valencia to 'A+/A-1' and assigned a negative outlook

The following is a press release from Standard & Poor's: -- We downgraded Spain's region of Valencia to 'A+/A-1' and assigned a negative outlook. -- We consider Instituto Valenciano de Finanzas (IVF) to be a government-related entity that plays a "critical" role as the region's financial agency that benefits from Valencia's financial guarantee. -- Because we equalize the ratings on the agency with those on the region, we are also downgrading IVF to 'A+/A-1'. -- The negative outlook mirrors that on Valencia, which reflects our expectation that it will continue posting deficits after capital expenditures at least until 2013. PARIS (Standard & Poor's) June 10, 2010--Standard & Poor's Ratings Services said today that it has lowered its long- and short-term issuer credit ratings on Spain's Instituto Valenciano de Finanzas to 'A+/A-1' from 'AA-/A-1+'. The outlook is negative. "The downgrade mirrors today's downgrade of the Autonomous
Community of Valencia (A+/Negative/A-1), which reflects the region's sharp budgetary deterioration in the last two years," said Standard & Poor's credit analyst Alejandro Casas. As a result, we presume that the tax-supported debt (which includes the public sector debt) will reach about 170% of operating revenues at year-end 2010, well above the 'AA-' median of comparable European peers. (See "Spain's Region of Valencia Downgraded To 'A+/A-1' From 'AA-/A-1+' Because Of Growth In Debt Burden; Outlook Negative," published June 10, 2010, on RatingsDirect.) The downgrade is also due to the retrenchment in the region's economic activity, which has been more acute than for most of its Spanish peers. We equalize the ratings on IVF with those on Valencia. This reflects our view of the strength of the region's explicit statutory guarantee whereby IVF's liabilities are considered as the region's debts. In addition, we see IVF as a government-related entity (GRE) plays a "critical" role for the region and that an "integral" link exists between them, and because of that we are "almost certain" that Valencia would provide support, according to our GRE criteria. In its role, IVF carries out some key functions that a private entity could not undertake, such as management of regional debt and public credit policy. In that sense, we think that the markets would perceive a default of IVF as tantamount to default of the region, particularly considering Valencia's financial guarantee. We believe IVF's importance to Valencia is also reflected in the regional government's strong involvement in IVF's management and stable financial support. We also believe that there is an "integral" link between IVF and the region considering that it exerts total control over IVF's strategy and day-to-day operations, and carries out extremely tight financial oversight. Based on these supporting factors, we think that there is an "almost certain" likelihood that Valencia would provide timely and sufficient extraordinary support to IVF in the event of financial distress. Nevertheless, we consider that IVF has a weak financial profile, illustrated by its high delinquency rates and poor capitalization. "Given that we equalize the rating on IVF with that on Valencia, the negative outlook mirrors that on the region, which reflects our expectation that Valencia will continue posting deficits after capital expenditures at least until 2013," said Mr. Casas. This is in line with the assumption under the Spanish Stability Program that the aggregated regional deficit will reach 1.1% of the regional GDP that year. The negative outlook also reflects our concerns about the national and regional economic climate, which we believe will continue to result in sluggish tax revenue growth. We could downgrade Valencia if we anticipate that persistently high deficits lift tax-supported debt to about 190%-200% of consolidated operating revenues by 2012, and, more importantly, we do not see this ratio stabilizing after 2012. Conversely, we could revise the outlook back to stable if we believe that the recently adopted measures to contain expenditures are leading to a gradual improvement in Valencia's operating performance and a gradual return to balanced budgets, enabling stabilization of the region's debt burden by 2012 to about the level in our base scenario. The decision will also depend on our assessment of the regional government's willingness to continue to reduce debt after 2012. We believe that IVF's "critical" role as Valencia's funding authority and public-credit provider, coupled with its "integral" link with Valencia, is unlikely to change in the coming years, particularly considering IVF's growing importance as the public funding arm of Valencia. However, any weakening in these two key aspects of the relationship between the entities would lead to a negative rating action. Given the steady deterioration of IVF's capital ratios, we understand that the critical role that the agency plays is likely to result in a sizable equity injection from the region, which would allow IVF's capital base to recover to a more robust level. RELATED CRITERIA AND RESEARCH Methodology And Assumptions: Rating International Local And Regional Governments, Jan. 5, 2009 Enhanced Methodology And Assumptions For Rating Government-Related Entities, June 29, 2009 Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at and RatingsDirect subscribers at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011. Primary Credit Analyst: Alejandro Casas, Madrid (34) 91-788-7202; Secondary Credit Analyst: Myriam Fernandez de Heredia, Madrid (34) 91-389-6942; Additional Contact: International Public Finance Ratings Europe; No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. 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