The severe global economic downturn has negatively impacted the credit quality of European LRGs in 2008, although Fitch notes the impact has been to a more moderate extent than for issuers in many sectors. Negative rating actions in 2008, however, were still relatively low: Fitch took 14 negative rating actions (consisting of downgrades and outlook revisions on international ratings) in 2008 affecting 10% of the LRGs rated by the agency in EMEA. Nevertheless, some of the negative rating actions were prompted by downgrades or outlook revisions to sovereign ratings which automatically affected LRGs rated at the same level.
Fitch believes there will be more pressure on LRGs' ratings in 2009 and 2010 and the agency expects the number of downgrades and outlook revisions to exceed those seen in 2008, particularly as the decline in fiscal revenues and less-disciplined deficit controls will cause deterioration in the overall credit quality of issuers in some countries. The main factors that will contribute to the negative credit trend include economic slowdown, resulting in lower growth of fiscal revenues, and increased expenditure pressure as LRGs have been encouraged to increase public capital expenditure in infrastructure to stimulate economic activity. These factors will result in an increase in overall deficits and debt levels.
Capital market issuance for subnationals in Europe, which has generally been modest in volume compared to issuance by corporations and banks, rose slightly in 2008 with issuance amounting to USD68bn year to date to end-November 2008 compared to USD61bn in 2007. Despite increased financing pressures for LRGs, Fitch expects total issuance to remain modest for the remainder of the year as potential issuers are refinancing by way of bilateral loans with banks rather than using the capital market because of the higher yields demanded by investors in the latter.
The liquidity profile of European subnationals is adequate at present, as most LRGs have a conservative debt repayment profile - only around 13% of total rated debt matured in 2008 and around 8% in 2009. LRGs also maintain high cash balances, which in some cases exceed their debt level. However, some entities have bonds with bullet maturities due in 2009 and, as access to capital markets has become more difficult, they will need to ensure that they have adequate back-up bank lines to cover any funding shortfall.
