Rating Action: Moody's takes actions on three Belgian Regions and Communities, and two Government-Related Issuers

Global Credit Research - 04 Dec 2020

Paris, December 04, 2020 -- Moody's Investors Service, ("Moody's") has today taken actions on three Belgian Regions and Communities, and two Government-Related Issuers (GRIs).

"Today's rating action on three Belgian Regions and Communities, as well as on two of their related issuers, reflects the significant negative pressures resulting from the coronavirus pandemic and the likely permanent impacts the crisis will have on regions' and communities' deficits and debt trajectories" says Matthieu Collette, Vice President -- Senior Analyst at Moody's and lead analyst for Belgian Sub-Sovereigns. "The vulnerability of Belgian regions and communities is rooted in the large share of their revenues linked to economic activity as well as in the resulting higher spending, mainly because of the boost in public investment. The materiality of the long-lasting impacts on their credit profiles will notably depend on their policy responses once the national and regional economies have recovered. The negative outlooks and the relative ranking resulting from today's rating action -- with the affirmation of the Community of Flanders' rating at Aa2, the downgrade of Communaute Francaise De Belgique's rating to A1 from Aa3 and the affirmation of the Walloon Region's rating at A2 -- capture, in Moody's view, both the current negative pressures and their relative vulnerability to shocks."

The coronavirus pandemic and the resulting global recession are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG (Environmental, Social, Governance) framework, given the substantial implications for public health and safety.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL437116 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADING COMMUNAUTE FRANCAISE DE BELGIQUE'S RATING TO A1, AFFIRMING THE P-1 RATING AND MAINTAINING NEGATIVE THE OUTLOOK

The downgrade of Communaute Francaise De Belgique (CFB)'s long-term rating to A1 from Aa3 reflects the drastic change in CFB's financial trajectory. At the end of 2020, net direct and indirect debt (NDID) will reach E10.5 billion from E8.5 billion in 2019. The NDID ratio will thus materially increase to 108.8% of total revenues in 2020 (from 73.5% at the end of 2018). In 2021-22, Moody's expects the financing deficit to be around E1 billion, above 9% of revenues -- against a near-stable 4.2% deficit since the 2009 global recession. This imbalance, which will contribute to a further increase in the debt burden (with a NDID ratio above 115% by 2022), results from the combination of (1) the impacts of the coronavirus recession on CFB's revenues and Moody's expectation that the Belgian gross domestic product (GDP) will not recover its pre-level crisis before 2023; (2) structural constraints on revenue growth, primarily from unfavourable demographic trends and (3) consistent spending pressures, as CFB's government is investing massively in education to fill the investment gap. The latter relates to the governance considerations for governments under Moody's ESG framework.

The negative outlook reflects that risks to CFB's fiscal forecast are tilted to the downside given the uncertain path of the coronavirus impacts and Moody's view that coping with the long-lasting impacts will be difficult, mainly because of CFB's reduced budgetary flexibility.

The affirmation of CFB's Prime-1 short-term rating reflects the community' strong internal and external liquidity. CFB benefits from an unquestioned market access as exemplified by the record high E1.8 billion bond issuances in 2020.

CFB's A1 rating incorporates a Baseline Credit Assessment (BCA) of a2 and Moody's assessment of a high likelihood of extraordinary support from the Government of Belgium.

RATIONALE FOR CHANGING THE OUTLOOKS TO NEGATIVE ON THE COMMUNITY OF FLANDERS AND AQUAFIN NV, AND AFFIRMING THE RATINGS

-- Flanders, the Community of

The change to negative from stable in the Community of Flanders (Flanders)' outlook reflects the potential permanent downward impacts of the coronavirus recession on several key credit considerations metrics, that could lead Flanders to post metrics inconsistent with a rating above that of the sovereign. At the end of 2020, Moody's expects Flanders' financing deficit to hit a record high of 25.9% of total revenues (amounting to E11.7 billion) due to a 5.6% decrease in operating revenues, a 11.3% increase in operating expenditures and a 158.1% increase in capital expenditures (CAPEX), at E10.1 billion. The net direct and indirect debt (NDID) will consequently reach E27.5 billion and the NDID ratio will materially increase to 61.0% of total revenues, from a low 42.6% in 2019. While the strong track record of balanced budget provides shock absorption capacity, the shock will test the ability of the community to adapt and face the need to maintain for a potentially prolonged period of time CAPEX and external funding respectively around 1.5 times and 4.5 times above annual average pre-crisis levels. In Moody's baseline scenario, the NDID ratio will thus reach an unprecedented 79% of total revenues by 2022. The ability and the political will to renew with the long history of conservative management over a reasonable time horizon will be key to the rating.

The affirmation of Flanders' Aa2 and Prime-1 ratings reflects the ongoing credit strengths including the strong and protective Belgian institutional framework, the sound pre-pandemic fiscal performance, the unquestioned market access and debt affordability, as well as the strong potential growth of the regional economy. The Flemish Community's Aa2 rating, which incorporates a BCA of aa2, exceeds the sovereign bond rating by one notch and reflects, in Moody's assessment, some of the previously cited features.

-- Aquafin NV

Moody's decision to change the outlook to negative from stable and affirm the Aa2/Prime-1 ratings of Aquafin NV reflects its very strong links with the Community of Flanders, as the publicly owned company in charge of the region's wastewater treatment infrastructure. Aquafin's alignment with the rating of Flanders reflects the strategic nature of the services that the company provides within Flanders. As such, its rating is derived primarily from the strength of the Community of Flanders without assigning a BCA.

RATIONALE FOR CHANGING THE OUTLOOKS TO NEGATIVE ON THE WALLOON REGION AND SOCIETE PUBLIQUE DE GESTION DE L'EAU, AND AFFIRMING THE RATINGS

-- Walloon Region

The change to negative from stable in the Walloon Region's outlook reflects that risks to its fiscal forecast are tilted to the downside given the uncertain path of the coronavirus impacts while the region's pre-pandemic fiscal position was weaker than its Belgian peers. At the end of 2020, Moody's expects the region's financing deficit to reach 3.5x the 2019 level (at E3.9 billion) and the NDID to increase to E26.3 billion, representing a very high 214.3% of total revenues. The commitment of the Walloon government to boost its public investment in the two to three coming years (to above E1 billion per year on average versus around E600 million planned before the crisis) will require increasing external funding. Moody's expects new borrowings to amount to 3 to 4 times annual average pre-crisis levels, leading the NDID ratio to further increase to above 240% by 2022. Preventing long-lasting impacts on the region's financials will require sustained and credible efforts once the Belgian economy recovered. In this respect, the region's track record of unbalanced budget when economic growth was supportive weighs on its credit profile and relates to governance considerations for governments under Moody's ESG framework.

The affirmation of the Walloon Region's A2 and (P)P-1 ratings reflects ongoing credit strengths including the strong and protective Belgian institutional framework and the region's significant revenue flexibility. The credit profile is also supported by the region's unquestioned market access, contributing to its debt affordability. In 2020, the region issued three highly demanded benchmark bonds for a total amount of E3.7 billion, two of which benefitting from the sustainability label.

The Walloon Region's A2 rating incorporates a BCA of a3 and Moody's assessment of a high likelihood of extraordinary support from the Government of Belgium (Aa3 stable).

-- Societe Publique de Gestion de L'Eau

Moody's decision to change the outlook to negative from stable and affirm the A2/P-1 ratings of Societe Publique de Gestion de L'Eau reflects its very strong links with the Walloon Region, as the publicly owned company in charge of coordinating and financing of the water sector in the region. SPGE's alignment with the rating of the Walloon Region thus reflects the strategic nature of the services that the company provides. As such, its rating is derived primarily from the strength of the region without assigning a BCA.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

-- Communaute Francaise De Belgique

In Moody's assessment, environmental risks are not material to CFB's credit profile, due to the person-related responsibilities exercised by communities in Belgium.

Social risks are material to CFB's credit profile. Due to the community's responsibilities (including education), social considerations mainly impact operating expenditures (such as the teachers' wages) and capital expenditures (including building or renovating schools) but also impact revenues. In this respect, Moody's also views the coronavirus outbreak as a social risk under its ESG framework.

Governance considerations are material to CFB's credit profile. We assess the community's financial management practices as sound, as illustrated by conservative and realistic macroeconomic forecasts as well as prudent and sophisticated debt management. At the same time, we view the government's inclination not to reach fiscal consolidation over the mandate as a key governance issue.

-- Flanders, the Community of

In Moody's assessment, environmental considerations are not material to Flanders' credit profile.

Social risks are material to Flanders' credit profile. Social considerations mainly impact expenditures due to the community's responsibilities (including education, welfare, health policy, employment, transport and housing) but also impact revenues. Moreover, Moody's views the coronavirus outbreak as a social risk under its ESG framework.

Governance considerations are material to Flanders' credit profile. The community benefits from high standards of governance and a strong track record of conservative financial management.

-- Aquafin NV

In Moody's view, environmental considerations are not material to Aquafin NV's credit profile. As a GRI, Aquafin NV is subject to environmental risks of its supporting government, the Community of Flanders, due to the very strong credit integration between the two.

Social considerations are not material to Aquafin NV's credit profile. As a GRI, Aquafin NV is subject to social risks of its supporting government, the Community of Flanders, due to the very strong credit integration between the two

Governance considerations are material to Aquafin NV's credit profile. Key decisions are ultimately made by the supporting government, the Community of Flanders, with frequent and heavy reporting requirements to and oversight by the government. Our assessment also takes into account the supportive regulatory framework under which Aquafin NV operates, as defined in a multi-year Master Agreement (MA).

-- Walloon Region

In Moody's view, environmental risks are not material to the Walloon Region's credit profile.

Social risks are material to the Walloon Region's credit profile. Social considerations mainly impact expenditures due to the region's responsibilities (including employment, transport and housing) but impact revenues as well. Moody's also views the coronavirus outbreak as a social risk under its ESG framework.

Governance considerations are material to the Walloon Region's credit profile. We assess the Walloon Region's financial management as sound as illustrated by prudent but sophisticated debt management. At the same time, the region's track record of unbalanced budget when economic growth was supportive weighs on its credit profile.

-- Societe Publique de Gestion de L'Eau

In Moody's view, environmental considerations are not material to SPGE's credit profile. As a GRI, SPGE is subject to environmental risks of its supporting government, the Walloon Region, due to the very strong credit integration between the two.

Social considerations are not material to SPGE's credit profile. As a GRI, SPGE is subject to social risks of its supporting government, the Walloon Region, due to the very strong credit integration between the two.

Governance considerations are material to SPGE's credit profile. Key decisions are ultimately made by the supporting government, the Walloon Region, with frequent and heavy reporting requirements to and oversight by the government. Our assessment also takes into account the supportive regulatory framework under which SPGE operates, as defined in a multi-year management contract.

PUBLICATION OF RATING ACTIONS ON REGIONS AND COMMUNITIES

The specific economic indicators, as required by EU regulation, are not available for the Communaute Francaise De Belgique; Flanders, the Community of; Walloon Region. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Belgium, Government of

GDP per capita (PPP basis, US$): 54,029 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.7% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.9% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -1.9% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.3% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: aa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

SUMMARY OF MINUTES FROM RATING COMMITTEE

On 01 December 2020, a rating committee was called to discuss the rating of the Communaute Francaise De Belgique; Flanders, the Community of; Walloon Region. The main points raised during the discussion were: Communaute Francaise De Belgique's and Walloon Region's governance and/or management, have materially decreased. The Community of Flanders' governance and/or management, have not materially changed. The issuers' fiscal or financial strength, including their debt profile, has materially decreased. The systemic risk in which the issuers operate has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

-- Communaute Francaise De Belgique

An upgrade of CFB's rating is unlikely because of the current negative outlook. The outlook could be stabilized if CFB were able to curb its deficit and consequently to control the increase in debt.

A continuation of wide deficits and increasing debt levels during a prolonged period, due to the absence of policy reaction and/ or subdued growth in revenues, would likely lead to a downgrade of the community's rating. A material weakening in market access would also be credit negative. Furthermore, a downgrade of the Belgian sovereign rating would have negative implications for CFB.

-- Flanders, the Community of

An upgrade of Flanders' rating is unlikely because of the current negative outlook. The outlook could be stabilized if the region were able to curb the emerging medium-term detrimental trajectory in deficits and debt.

Permanent impacts of the coronavirus recession -- including the need to rely heavily on external funding -- and/ or the absence of a credible plan over a reasonable time-horizon to return to a balanced budget would weigh on Flanders' rating. A material weakening in market access would be credit negative. A downgrade of Belgium' sovereign rating would also have negative implications.

-- Aquafin NV

An upgrade of Aquafin NV's rating is unlikely because of the current negative outlook. As Aquafin NV's rating is effectively capped by the Aa2 rating of its support provider, the Community of Flanders, a stabilization of the outlook would require a similar rating action on Flanders.

Given the very strong links between Aquafin NV and Flanders, a material weakening in the community's creditworthiness would put downward pressure on the company's rating. A loosening of the relationship with the Community of Flanders, including an alteration of the MA, would also be credit negative. In addition, a weakening of the company's liquidity profile and/ or a sustained deterioration in Aquafin NV's operating performance, leading to a rapid increase in its debt metrics, could prompt a downgrade of the entity's rating.

-- Walloon Region

An upgrade of the Walloon Region's rating is unlikely because of the current negative outlook. The outlook could be stabilized if the region were able to curb the emerging medium-term detrimental debt and deficit trajectory.

A prolonged period of wide financing deficits coupled with rapidly increasing debt levels, due to subdued growth in revenues and/ or failure to use budgetary flexibility (including the region's zero-based budgeting exercise), would weigh on the region's rating. A material weakening in market access would be credit negative. A downgrade of Belgium's sovereign rating would also have negative implications for the Walloon Region.

-- Societe Publique de Gestion de L'Eau

An upgrade of SPGE's rating is unlikely because of the current negative outlook. As SPGE's rating is effectively capped by the A2 rating of its support provider, the Walloon Region, a stabilization of the outlook would require a similar rating action on the region.

Given the very strong links between SPGE and the Walloon Region, a material weakening in the region's creditworthiness would put downward pressure on the company's rating. A loosening of the relationship with the region, including an alteration of the management contract, would also be credit negative. In addition, a weakening of the company's liquidity profile and/ or a sustained deterioration in SPGE's operating performance, leading to a rapid increase in its debt metrics, could prompt a downgrade of the entity's rating.

The principal methodology used in rating Flanders, the Community of, Communaute Francaise De Belgique and Walloon Region was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. The principal methodology used in rating Societe Publique de Gestion de L'Eau and Aquafin NV was Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL437116 or the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

** Rating Solicitation

** Issuer Participation

** Participation: Access to Management

** Participation: Access to Internal Document

** Disclosure to Rated Entity ** Endorsement ** Lead Analyst ** Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthieu Collette Vice President - Senior Analyst Sub-Sovereign Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Mauro Crisafulli Associate Managing Director Sub-Sovereign Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454

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