City of Barcelona Affirmed At 'A-'; Outlook Positive


  • Barcelona's strong financials, with sustained operating surpluses, low debt, and ample and stable liquidity reserves are the result of both Barcelona's very prudent financial management and its relatively sound economic environment.
  • We continue to cap our long-term rating on Barcelona at the level of our long-term rating on Spain.
  • We are affirming our 'A-' long-term rating on Barcelona.
  • The positive outlook continues to reflect that on Spain.
RATING ACTION
On March 15, 2019, S&P Global Ratings affirmed its 'A-' long-term rating on 
the Spanish City of Barcelona. The outlook is positive. 

OUTLOOK
The rating on Barcelona is capped by the rating on Spain (unsolicited; 
A-/Positive/A-2), with the positive outlook on Barcelona therefore reflecting 
that on the sovereign. 

Upside scenario 
We would raise our ratings on Barcelona over the next 12 months if we upgraded 
Spain to 'A' or higher, assuming the city continues to perform in line with 
our base-case scenario.

Downside scenario 
We would revise our outlook on Barcelona to stable over the next 12 months if 
we revised the outlook on Spain to stable. 


RATIONALE
The long-term rating on Barcelona primarily reflects our long-term rating on 
Spain. We consider that Spanish cities do not meet the criteria under which we 
would rate them higher than the related sovereign. We consequently cap the 
rating on Barcelona at the level of our long-term rating on Spain.

In our opinion, Spanish cities lack sufficient financial autonomy to 
effectively resist significant sovereign intervention, such as reductions or 
delays in central government transfers. Moreover, we do not believe that 
Barcelona's credit quality could withstand the stress of a sovereign default, 
given its reliance on central government transfers and tax transfers (about 
40% of operating revenues). Like all Spanish cities, Barcelona has no 
substantial legislative power over its financial framework.

The rating on Barcelona is below our assessment of the city's stand-alone 
credit profile (SACP), which we assess at 'aa'. The SACP is not a rating but a 
means of assessing the intrinsic creditworthiness of a local and regional 
government (LRG) under the assumption that there is no sovereign rating cap.

We have updated our base-case scenario for Barcelona, extending our forecast 
horizon to 2021. We believe Barcelona will continue to post very strong credit 
metrics through 2021, thanks to management's continuous commitment to sound 
financials. We do not expect this commitment will change, despite political 
uncertainties stemming from the upcoming elections of May 2019. Furthermore, 
we expect Barcelona will limit debt intake for refinancing purposes in the 
coming years, keeping the debt burden low. 

Prudent financial management and a sound local economy support the city's 
creditworthiness
With more than 1.6 million residents at year-end 2018, Barcelona is Spain's 
second largest city and one of the country's business centers. In our view, 
Barcelona's economy is strong and diverse, accounting for one-fifth of the 
country's exports. In the last quarter of 2018, unemployment in Barcelona 
stood at 10.3%, compared with the national average of 14.6%. Barcelona has 
fully recovered the jobs lost during the financial crisis.

The city operates within an institutional framework marked by a high level of 
central government control and support. Since the European debt crisis, the 
Spanish government has tightened controls on LRGs, including cities, by 
imposing spending and debt ceilings, and has also strengthened deficit control 
rules. At the same time, it has implemented financial support measures, such 
as extending central government loans to clear LRGs' debts to suppliers and 
allowing the LRGs greater tax flexibility on certain fiscal items.

Barcelona has not benefitted directly from these supportive measures because 
its financial performance has been sound for several years. We believe that, 
as in the past, Barcelona's management will continue to comply with its own 
set of financial targets, which are more stringent than the national ones. 
Barcelona has repeatedly posted surpluses after capital accounts in recent 
years, as a consequence of its own prudent budgetary practices. We understand 
these surpluses will likely reduce gradually to an overall balanced position, 
to avoid overshooting the target as has happened previously. Spanish 
legislation is currently very restrictive with regard to the use of past 
surpluses.

The minority nature of Barcelona's current government over the past four years 
has complicated the budgeting process. In 2017 and 2018, the budget was 
approved only indirectly, whereby the mayor requested and lost a confidence 
vote and, after the opposition did not propose an alternative government 
within a 30-day period, the budget was automatically approved. The 2019 budget 
has not been approved. Given the short time remaining before local elections, 
Barcelona will extend the 2018 budget to 2019, as occurred in 2016.

Despite this difficulty, we expect the city will continue meeting its own 
financial targets: operating margins of about 15% of operating revenues, zero 
deficits after capital accounts (which is also a legal requirement for 
municipalities in Spain), and debt amounting to far less than 60% of operating 
revenues.

Financing needs are only for refinancing purposes, reflecting small surpluses 
after capital expenditure 
We expect that, in line with its own targets, Barcelona will post operating 
surpluses slightly above the 15% of operating revenues in our forecast horizon 
of 2019-2021. This is below Barcelona's historical performance, in particular 
during 2012-2015 when operating margins exceeded 20% of operating revenues.

We believe operating spending will remain high in the next few years, but will 
not threaten the city's operating margins, since we expect that operating 
revenues will continue to increase alongside GDP growth. Barcelona stands to 
benefit from economic growth both in terms of increased local taxes and larger 
government transfers (including shared taxes), which currently represent about 
40% of Barcelona's operating revenues.

We forecast that Barcelona's investments will amount to about €450 million per 
year until 2020, which is slightly below our previous forecast and more in 
line with the 2016-2018 results. Investments brought forward by the current 
administration include small projects to improve the livability of the city, 
for instance, optimizing local markets or the plan for the city's 
neighborhoods ("plan de barrios"). A major investment is essentially being 
carried out by Barcelona's housing operator--Instituto Municipal Vivienda y 
Rehabilitaci├▓n de Barcelona (IMHAB)--with 135,000 square meters of housing and 
51,000 square meters of other facilities (such as commercial space and 
services) to be built by 2021.

We expect Barcelona will post a narrow surplus after capital accounts of about 
1% of total revenues over 2019-2021. This surplus is lower than the average of 
6.8% recorded over 2012-2015, owing to the city's efforts to adapt its 
budgetary process to reduce unwanted surpluses by executing on expenditure 
plans.

Over 2019-2021, the city's financing requirements will be limited to 
refinancing. In 2018, the city's refinancing needs totaled €49.5 million, 
which it covered with a tranche of a €100 million loan from the Council of 
Europe Development Bank. Barcelona's refinancing needs for 2019 and 2020 stand 
at €55.9 million and €81.4 million, respectively.

We expect the city's direct debt will remain stable through 2021 at about €836 
million. Tax-supported debt is set to rise slightly, due to large investments, 
representing 36.4% of consolidated operating revenues in 2021 compared with 
33.6% in 2016.

Barcelona's liquidity remains solid. We forecast that free cash and liquid 
assets cover the city's debt and interest payments by more than 9x over the 
next 12 months. Barcelona's liquidity could weaken slightly as a result of 
capital expenditure payments, but we do not expect the city will use such 
liquidity to fund debt service requirements, which it will continue to 
refinance. The city actively manages its liquidity and has been able to reduce 
the period of payments to suppliers, which currently stand at less than 30 
days.

Our assessment of contingent liabilities factors in risks stemming from the 
city's links with Catalonia, Barcelona's home region. The city has taken an 
active approach to managing cross flows between the two governments, signing 
an arrears clearance agreement in 2014 and monitoring joint projects. Arrears 
payments have reduced considerably, and stood at €27 million at the end of 
November 2018, down from €38 million at year-end 2017 and €144 million in 
2015. Transfers from Catalonia average €100 million per year, and are mostly 
related to compensation for the provision of specific services, which the city 
provides on behalf of the region.
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