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Moody's axes Naples, investment status retained.

BANKING AND CREDIT NEWS-26 January 2010-Moody's axes Naples, investment status retained(C)1994-2010 M2 COMMUNICATIONS

26 January 2010 - Moody's reduced Monday the investment status of the Italian city of Naples on the back of hampered cash flow generation.

Specifically, the agency slashed Naples's long-term debt rating to Baa1 from A3, revising its credit risk assessment to "moderate" from "low". Yet, further downgrades over the medium term are unlikely given the "stable" outlook on the rating.

"Today's rating action primarily reflects Naples' persistent difficulties in terms of cash flow generation, which foster liquidity pressure and rising commercial liabilities, as well as an increasing level of financial leverage in the context of structural budgetary rigidity," Moody's analyst Francesco Soldi said.

Moody's views Naples's low tax collection as a primary undermining factor of its creditworthiness. As a result, the city has amassed receivables on own-source revenues on its balance sheet that considerably surpass the accrued sums, the agency said. Thus, commercial liabilities have increased and financial leverage has surged.

Naples's direct municipal debt came in at EUR1.6bn (USD2.25bn) at the end of last year, or around 116% of the latest realised operating revenues, Moody's said. However, support from the central and regional governments has helped keep a better debt-to-revenue ratio in comparison with the country's other major cities. That said, Moody's also noted the city's onerous wider public sector.

"The main challenges for Naples are to improve its operating cash flows, absorb its large commercial liabilities built up over time and increase its self-funding capacity," Soldi added.

The municipality has pledged to take measures to handle governance problems and deal with structural weaknesses of Naples's finances. However, the city is struggling with its socio-economic situation and the blow dealt by the global slump.

Naples's financial results will remain squeezed by these factors. But its credit quality will remain consistent with its rating in view of its role and status and the credit protection measures within Italy's institutional framework, the agency concluded.

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Publication:M2 Banking & Credit News (BCN)
Date:Jan 26, 2010
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