Press Release

DBRS Morningstar Assigns First-Time “A” / R-1 (low) Issuer Ratings to the City of Madrid

Sub-Sovereign Governments
April 22, 2022

DBRS Ratings GmbH (DBRS Morningstar) assigned a Long-Term Issuer Rating of “A” and a Short-Term Issuer Rating of R-1 (low) to the City of Madrid (Madrid). The trend on all ratings is Stable.

Madrid's ratings are underpinned by (1) Spain's capital city’s large and diversified economy; (2) Madrid's very strong financial performance over the last decade and the city's sound medium-term fiscal outlook; and (3) the significant improvement in Madrid's debt metrics to a relatively low level and its effective public sector debt management strategy. DBRS Morningstar also views positively Madrid's institutional environment, including a rather predictable and well calibrated financing framework for Spanish municipalities. Madrid's ratings also benefit from DBRS Morningstar's assessment of a high likelihood of support stemming from the Kingdom of Spain (A, Stable). DBRS Morningstar takes the view that despite its intrinsic strengths, the city of Madrid does not have the constitutional protection to be rated above the sovereign rating and its ratings are therefore capped by the Kingdom of Spain’s ratings.

The Stable trend reflects DBRS Morningstar's view that risks to the ratings are currently balanced. From an economic standpoint, the COVID-19 pandemic continues to remain a source of uncertainty. Although Madrid, thanks to its very strong financial position at the end of 2019, has so far weathered the economic and financial impacts of the pandemic well, DBRS Morningstar will monitor any indications of a long-term impact on the local economy that could for instance take the form of an only partial recovery of the tourism industry. In addition, higher inflation, particularly on the energy front, is likely to linger. Its potential impact on the economic recovery and Madrid's budgetary expenditure will remain key areas of focus going forward. These challenges are compensated for by the city's very strong economic and tax bases, its fiscal flexibility and Madrid's strong financial management track record.

The ratings could be upgraded if the Kingdom of Spain's ratings were upgraded.

The ratings could be downgraded if any or a combination of the following occur (1) the Kingdom of Spain's ratings were downgraded; (2) although currently unlikely given its intrinsic strengths, a structural weakening in the city's fiscal performance, leading to fiscal deficits widening and a sustained and material rise in public sector debt.


Recovery is Underway but the Economic Outlook Remains Clouded with Uncertainties

The COVID-19 outbreak significantly adversely affected the economies of Madrid and Spain in 2020. The region of Madrid's gross domestic product (GDP) decreased by 11.0% in 2020, broadly in line with Spain's 10.8% decline, largely reflecting the extent of the healthcare crisis, the stringency of the lockdown that followed, and the high concentration of economic activity in sectors severely affected such as tourism. In 2021, economic output rebounded by 5.1% in Spain, largely driven by investment and domestic consumption. Real GDP in the region of Madrid is expected to have rebounded faster, growing at 6.5%. Economic recovery is currently expected to continue, as the healthcare situation continues to normalise. Nevertheless, DBRS Morningstar points out that the recent rise in inflation, largely reflecting the surge in energy prices exacerbated by Russia's invasion of Ukraine, is likely to weigh on the economic recovery in the short-term.

The potential lasting impact of the COVID-19 shock over the local and regional economy, particularly its labour market, has been largely mitigated by the supportive measures taken by the national government. This is exemplified by the strong employment performance of the Spanish and local labour market in recent months. At the end of 2021, the region of Madrid's unemployment rate had largely recovered to its pre-pandemic level, standing at 10.1% compared with 10.0% at the end of 2019, and a peak of 13.5% in Q4 2020. In addition, DBRS Morningstar considers that financial resources expected from the Next Generation EU could further alleviate the long-term impact of the pandemic and possibly boost the economic recovery. Going forward, the impact of higher inflation on consumption and investment as well as the potential uplift from the absorption of EU funds will remain important factors for DBRS Morningstar to assess the strength of the recovery.

Madrid’s Benefits From a Strong Financial Performance with Ample Fiscal Space

On the fiscal front, the city of Madrid benefits from a very strong track record of fiscal consolidation over the last decade. Madrid recorded a very sound budgetary performance, including significant recurring surpluses, which allowed it to markedly strengthen its financials and build up significant fiscal space. Between 2015 and 2019, Madrid's financing surplus averaged 22% of its operating revenues, an outstanding performance. COVID-19 primarily affected Madrid's revenues but the fiscal outturns remained strong throughout the pandemic. Although impacted by the decline in economic activity, Madrid's tax receipts remained solid in 2020, reflecting their relatively low correlation to the economic cycle, being mostly based on property taxes which tend to remain stable over time. Madrid also implemented countercyclical tax reductions throughout the pandemic, aiming to support households' purchasing power, and the city benefited in 2020 and 2021 from still high ordinary transfers (entregas a cuenta) from the national government, which supported Madrid's overall financial performance. As a result, while Madrid's financing surplus declined compared to 2019, related to increasing operating and capital expenditures, it remained positive over the last two years, averaging 3.5% of operating revenues.

For 2022 and 2023, DBRS Morningstar currently takes the view that the fiscal outlook for the city of Madrid remains sound. Nevertheless, downside risks, particularly related to the rise in inflation could heighten pressures on the city's expenditure, in particular its personnel costs. Effectively controlling operating expenses will remain critical to maintain the very strong fiscal performance over the medium-term. DBRS Morningstar also expects a higher level of capital expenditure in coming years, recovering from a lower level of investment in the years prior to the pandemic and supported by European funds and possibly the recourse to new debt. The city solicited financing under the NGEU programme of approximately EUR 200 million at the end of 2021, primarily focused on developing low carbon emission zones on its territory as well as sustainable urban transport. Going forward, additional financing requests will materialise to finance the implementation of the city's Recovery, Transformation and Resilience plan. Finally, while the uncertainty surrounding the tax on capital gains for real estate transactions (plusvalía municipal) generated at the end of 2021 remains, the impact for municipal finances has so far been manageable. This will however remain a point of focus for DBRS Morningstar going forward. Overall, despite the challenges, DBRS Morningstar considers Madrid's fiscal performance and outlook as strong, supported by the track record and still considerable fiscal space.

Madrid’s Debt Sustainability is Very Strong, Supported by Sound Debt and Liquidity Management

Madrid’s debt sustainability benefits from the low public sector debt position at the end of 2021, representing 33% of its operating revenues (Banco de España, "BdE" perimeter) or 38% when considering DBRS Morningstar-adjusted debt metrics, which include outstanding commercial debt. Madrid debt stock decreased very markedly over the last decade. Between the end of 2012 and the end of 2021, Madrid's debt (BdE perimeter) was reduced by 78% from EUR 7.7 billion to EUR 1.7 billion. DBRS Morningstar views positively the very strong debt reduction steadily implemented by the municipality, as it allowed Madrid to rebuild significant public finances headroom. Going forward, DBRS Morningstar foresees Madrid's debt ratio to marginally increase but remain moderate at around 40-45% of operating revenues before stabilising, reflecting the possible inclusion of a remaining loan related Madrid Calle 30, and a higher level of capital expenditure possibly financed in part through debt.

Madrid's liquidity and debt management is also strong. The city maintains diversified funding sources through bank loans with a wide range of institutions and debt issuances. At the end of 2021, the city had EUR 500 million in two bond issuances, or about 30% of its debt stock (BdE perimeter). It also maintains a relatively long average life on its debt, at 6.8 years at the end of 2021, with a smooth amortisation profile and more than 80% at fixed rates. Finally, the liquidity position is deemed strong, and Madrid maintains flexibility throughout the year with the addition when necessary of credit line facilities. DBRS Morningstar also takes the view that the central government’s financing facilities, although not currently used by Madrid to finance its capital expenditure programme, represent a potential financing backstop for the city.


A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at


DBRS Morningstar European Sub-Sovereign Governments Scorecard generates a result in the AA (high) – AA (low) range. Additional considerations factored into the Rating Committee decision included DBRS Morningstar’s view that the city of Madrid does not have the constitutional protection to be rated above the sovereign rating. In addition the Rating Committee considered the likely increase in the debt position of the city in the next two to three years, the remaining macroeconomic uncertainties and the risks to the fiscal outlook, particularly on the expenditure side.

The main points discussed during the Rating Committee include: the city’s economic growth prospects including the potential recovery of the tourism sector; Madrid’s public finances, their very strong track record and their trajectory; the city’s debt and liquidity profile, the city’s overall governance, the likelihood of support from the national government, if ever needed.

For more information on the Key Indicators used for the Kingdom of Spain, please see the Sovereign Scorecard Indicators and Building Block Assessments:

The national scorecard indicators were used for the sovereign rating. The Kingdom of Spain’s rating was an input to the credit analysis of the City of Madrid.

All figures are in euro (EUR) unless otherwise noted.

The principal methodology is the Rating European Sub-Sovereign Governments (September 1, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021).

The sources of information used for this rating include the City of Madrid for financial position for the 2015-20 period (Annual accounts for the 2015-20 period), monthly budgetary execution documents for 2020, 2021 and 2022, and debt structure documentation for the 2015-21 period, Bank of Spain for the debt stock during the period between 2015 and Q4 2021 (Debt according to the excessive deficit procedure documents), Independent Authority for Fiscal Responsibility (AIReF) for its estimate of the 2021/2022 local governments’ budgetary performance (Informe complementario de evaluación individual de las líneas fundamentales de los presupuestos para 2022 de las corporaciones locales, November 2021), Instituto Nacional de Estadística (INE), Ministry of Finance; the 2020 European Social Progress Index from the European Commission. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on the City of Madrid.

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: DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage:

The sensitivity analysis of the relevant key rating assumptions can be found at:

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Nicolas Fintzel, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Co-Head of Global Sovereign Ratings
Initial Rating Date: April 22, 2022
Last Rating Date: Not applicable as there is no last rating date.

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