DBRS Morningstar Confirms the Autonomous Region of Madeira at BB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer Rating of the Autonomous Region of Madeira (Madeira) at BB (high) and its Short-Term Issuer Rating at R-4. The trend on all ratings remains stable.

KEY RATING CONSIDERATIONS

Madeira’s ratings are underpinned by (1) the region’s stabilising financial performance over the last few years and its slowly improving debt metrics; (2) the financial oversight and support to the regional government from the Republic of Portugal (BBB (high), Stable); and (3) Madeira’s enhanced control over its indirect debt as well as its commercial liabilities through a gradual recentralisation of these liabilities onto its own balance sheet.

The possible consequences of the Coronavirus Disease (COVID-19) on the regional economy will remain a focus point in coming months for DBRS Morningstar. The rating agency currently considers that any impact would largely be concentrated over a few quarters, but lasting effects on tourism or other sectors that translate into weaker fiscal outcomes would be credit negative. DBRS Morningstar considers that ongoing support from the national government to navigate through the current heightened challenges will be critical for Madeira's economy and the region's overall credit profile.

RATING DRIVERS

Madeira's rating could be upgraded if any or a combination of the following occur: (1) Madeira substantially reduces its indebtedness; (2) the Portuguese sovereign rating is upgraded; (3) Madeira’s economic indicators continue to improve and the region enhances its economic resiliency; or (4) there are indications of a further strengthening of the relationship between the region and the central government.

Madeira's rating could be downgraded if any or a combination of the following occur: (1) there is a negative rating action on the Portuguese sovereign; (2) Madeira fails to stabilise its financial performance and debt metrics over the medium-term; (3) indications emerge that the financial support and oversight currently provided by the central government weaken; or (4) there is a structural reversal in the reduction of the region’s indirect and guaranteed debt.

RATING RATIONALE

Improving Financial Metrics but Madeira’s Debt Levels Remain Very High

Despite DBRS Morningstar’s expectation that Madeira’s debt metrics are likely to continue to slowly improve over the medium-term, the region’s still very high direct and indirect debt levels continue to weigh on its ratings. The region’s geographical location as an archipelago in the Atlantic Ocean and the government’s still large exposure to regional companies also remain key challenges to Madeira’s overall credit profile.

Madeira’s overall fiscal performance has markedly improved since 2013. Expenditure control and some growth in tax revenues, reflecting tax hikes and economic growth, have allowed the region to deliver a stronger financial performance. The region’s deficit represented 8% of operating revenues in 2019 based on provisional results, in line with the average of the last three years, but down from a very large 74% at the end of 2013.

Solid gross domestic product (GDP) growth, supported the stronger fiscal performance and allowed Madeira since 2012 to decrease its very high debt ratios. From an international comparison, the region’s debt-to-operating revenues, at 470% at the end of 2019, remains very high. Madeira’s debt ratio continues to represent, in DBRS Morningstar’s view, the main drag on the region’s ratings. However, DBRS Morningstar views positively the downward trajectory of the ratio over the last few years.

Enhanced Oversight and Sovereign Guarantees Support the Rating

DBRS Morningstar acknowledges that the region has taken substantial steps to increase transparency and monitoring around its indirect and guaranteed debt, but also to reduce its debt stock. In addition, the national government’s support via the Portuguese Treasury and Debt Management Agency (IGCP) is a positive credit feature for the region, as it strengthens its overall debt management.

The explicit guarantees provided by the central government for the refinancing of the regional debt and DBRS Morningstar’s expectation that this support will continue are positive credit features. The region’s refinancing needs have fully benefited from the national government’s explicit guarantee in recent years and should continue to do so going forward (upon request from the regional government).

While DBRS Morningstar expects considerable economic disruption in 2020 related to the COVID-19 outbreak, its full impact on regional output and Madeira's finances will depend on the depth and duration of the shock, two parameters which remain uncertain at the moment.

ESG CONSIDERATIONS

Institutional Strength, Governance and Transparency (G) was a key driver behind this ration action. Madeira’s recentralisation of its regional companies’ debt onto its own balance sheet and the subsequent enhanced transparency and oversight over their operations and finances highlight the strengthening of the region’s Governance in recent years and was significant to the region’s credit rating. A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

RATING COMMITTEE SUMMARY

DBRS Morningstar’s European Sub-Sovereign Scorecard generates a result in the BBB (low) – BB range. The main points discussed during the Rating Committee include the COVID-19 outbreak and its potential impact on the regional economy, the relationship between the central government and the Autonomous Region of Madeira, as well as the trend in the region’s financial metrics.

For more information on the Key Indicators used for the Republic of Portugal, please see the Sovereign Scorecard Indicators and Building Block Assessments: http://www.dbrsmorningstar.com/research/358292.

The national scorecard indicators were used for the sovereign rating. The Republic of Portugal’s rating was an input to the credit analysis of the Autonomous Region of Madeira.

Notes:
All figures are in euros (EUR) unless otherwise noted.

The principal methodology is Rating European Sub-Sovereign Governments (September 6, 2019) : https://www.dbrsmorningstar.com/research/350151/rating-european-sub-sovereign-governments.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The sources of information used for this rating include the 2015-19 financial statements and budgetary execution from the Autonomous Region of Madeira, debt metrics from the Bank of Portugal, economic indicators (unemployment, GDP metrics) from the Instituto Nacional de Estatística (INE). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: http://www.dbrsmorningstar.com/research/358945/.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions and Sovereign Ratings Group
Initial Rating Date: June 15, 2018
Last Rating Date: October 11, 2019

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