Reuters: Financial Services and Real Estate: TEXT-S&P cuts Institut Catala de Finances ratings

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TEXT-S&P cuts Institut Catala de Finances ratings May 8th 2012, 16:05 Tue May 8, 2012 12:05pm EDT (The following statement was released by the rating agency) Overview -- We lowered our ratings on the Spanish Autonomous Community of Catalonia, the government owner of the financial agency, Institut Catala de Finances (ICF), to 'BBB-/A-3' from 'A/A-1' on May 4, 2012. -- We consider ICF to be a Catalan government-related entity under our criteria. -- We equalize our ratings and outlook on ICF with those on Catalonia because we think that there is an "almost certain" likelihood that ICF would receive timely and sufficient extraordinary support from the Catalan government in the event of need. -- Accordingly, we are lowering our long- and short-term ratings on ICF to 'BBB-/A-3' from 'A-/A-2'. -- The negative outlook mirrors that on our rating on Catalonia. Rating Action On May 8, 2012, Standard & Poor's Ratings Services lowered its long- and short-term issuer credit ratings on financial agency Institut Catala de Finances (ICF), based in Spain's Autonomous Community of Catalonia, to 'BBB-/A-3' from 'A-/A-2'. The outlook is negative. Rationale We rate ICF in accordance with our methodology for government-related entities (GREs). Our rating on ICF reflects our opinion that there is an "almost certain" likelihood that the Autonomous Community of Catalonia (ICF's owner; BBB-/Negative/A-3) would provide timely and sufficient extraordinary support to ICF in the event of financial distress. Our opinion is based on our view of ICF's: -- "Integral" link with the Catalan government (the Generalitat). ICF is a public entity, created by law, fully owned, tightly controlled and supervised by the Generalitat. We understand it cannot be subject to bankruptcy filing, and, if dissolved, the Generalitat would be ultimately liable for its obligations. Moreover, in 2011 the Catalan Parliament approved an explicit, irrevocable, unconditional and direct guarantee from the Generalitat on ICF's debt. In our view, this guarantee reinforces the integral link between ICF and Catalonia's government. In light of this link, we think that the financial market would perceive a default of ICF as tantamount to a default of the region; and -- "Critical" role for the government (revised from "very important" previously). In our view, the guarantee provided by the Catalan government to ICF highlights what we now see as ICF's central role in meeting the government's key political and economic objectives. In our opinion, the Catalan government is gradually enhancing ICF's role following the example of Instituto de Credito Oficial (ICO; BBB+/Negative/A-2). ICO is the central government financial agency, which we rate at the same level as the Kingdom of Spain and which benefits from a similar type of government guarantee. We understand that in this vein the Catalan government intends that ICF obtain a banking license as ICO has. We view that ICF operates essentially on behalf of the Catalan government and its main purpose is to implement the financial side of its public policies. This role, in our view, cannot be easily replaced by a private entity. ICF takes on public lending policies and provides long-term financing to small and midsize enterprises (SMEs) and to entities owned by the Catalan government. We believe that the regional government's strong involvement in ICF's management and stable financial support further underpin ICF's importance to Catalonia. We have also lowered to 'bb' from 'bbb-' our assessment of ICF's stand-alone credit profile (SACP). The SACP reflects our view of the entity's creditworthiness before taking into account the potential for extraordinary government intervention, but factoring in regular ongoing interactions with the government, especially the continuation of annual capital injections. We consider ICF's business profile to be weak due to its narrow business and geographic concentration and its relatively small size in the regions where it is present. We also assess ICF's financial profile as weak. The risks to the entity's liquidity position have increased significantly in the past few quarters on the back of deteriorating conditions in the wholesale funding markets. Spain's deteriorating economy has also heightened ICF's credit risk, in our view, including specifically a strong single-name concentration and higher nonperforming loans than peers. In our opinion, ICF's strong capitalization (its Tier 1 ratio stood at 23.1% on Sept. 30, 2011) only partially offsets these risks. Our assessment of ICF's capitalization takes into account Catalonia's ongoing capital support in the past, which we believe will continue underpinning ICF's solvency if necessary. Liquidity At mid-March 2012, ICF's liquidity position, at EUR428 million, was, in our view, adequate to cover 2012 maturities of EUR307 million. Even though ICF faces substantial wholesale funding maturities in 2013, we note that it is launching different measures aimed at enhancing its liquidity and refinancing the amount of debt due next year. Additionally, ICF could halt its lending activity and reallocate funds to service debt in the event of further liquidity strains. This would, in our view, backstop possible liquidity shortfalls over the next two years. Outlook The negative outlook on ICF mirrors that on our rating on Catalonia, which in turn reflects our view of the risk that Catalonia might deviate from budgetary targets set by the central government, resulting in worse budgetary performance and debt accumulation in the coming years. The outlook also reflects the risk that liquidity and funding support mechanism set up by the central government might not function as smoothly as expected. We could also envisage a negative rating action on ICF if we perceived that its link to or role for Catalonia was weakening. However, we currently view this as unlikely given ICF's importance as the Catalan government's main instrument for implementing public credit policy. We could revise our outlook on Catalonia, and hence on ICF, to stable if we: -- Perceived that Catalonia's budgetary performance and debt burden were in line with our base-case scenario for 2012-2014, and assuming a gradual reduction in the deficit after capital expenditures; -- Considered that as a result, the region's management quality and liquidity positions were not likely to deteriorate; -- 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 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- Rating Finance Companies, March 18, 2004 Ratings List Downgraded; CreditWatch/Outlook Action To From Institut Catala de Finances Issuer Credit Rating BBB-/Negative/A-3 A-/Watch Neg/A-2 Senior Unsecured BBB- A-/Watch Neg (Caryn Trokie, New York Ratings Unit) Link this Share this Digg this Email Reprints

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