Morningstar DBRS Confirms the Autonomous Community of Madrid at A (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its Long-Term Issuer Rating on the Autonomous Community of Madrid (Madrid or the region) at A (high) and its Short-Term Issuer Rating at R-1 (low). The trends on both credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
Madrid's credit ratings remain underpinned by (1) the region's large and diversified economy; (2) its strong fiscal results since 2018, which Morningstar DBRS expects to continue; (3) its sound debt structure and consistent access to financial markets; and (4) its strengthened liquidity profile. Despite lower economic growth prospects from 2025, Morningstar DBRS anticipates that the region's strong management will be able to control growth in expenditures and limit debt accumulation.

The Stable trends reflect Morningstar DBRS' view that risks to the credit ratings are currently balanced. Despite the lower economic growth expected in the medium term, Madrid's strong financial management combined with the return of fiscal rules should allow the region to continue making progress with its declining debt trajectory. Moreover, the regional funding equalisation system, to which Madrid is a net contributor, and the region's fiscal leeway provide budgetary flexibility against the possibility of a fiscal deterioration in the medium term.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the credit ratings if the region maintains strong financial fundamentals and the Kingdom of Spain's credit ratings are upgraded. Madrid does not have the constitutional protection to be rated above the sovereign credit rating and its credit ratings are therefore capped by the Kingdom of Spain's credit ratings.

Morningstar DBRS could downgrade the credit ratings if any or a combination of the following occur: (1) a structural reversal in the region's fiscal consolidation, leading operating deficits to widen over time; (2) a marked and lasting deterioration in Madrid's debt metrics, including larger and costlier annual maturities and higher leverage; or (3) the Kingdom of Spain's credit ratings were downgraded.

CREDIT RATING RATIONALE
Tax Revenue Growth and Tight Expenditure Control to Maintain Improvement of Financial Performance Stemming From Regional Financing System

Madrid's financial performance in 2024 greatly improved, with the regional financing deficit at 2.9% of operating revenues, down from a deficit of 5.3% of operating revenues in 2023. The regional deficit remains under control and continues to evolve closer to budget balance, regardless of the capital investment efforts that the region is implementing. Morningstar DBRS believes that the capital investment effort that the region is forecasting to maintain will lead it to continue posting financing deficits, especially given the marked decrease in European Union (EU) funds the region will receive from 2025 onwards. Indeed, thanks to a high inflow of these funds in 2024, Madrid improved its financing deficit to 0.2% of GDP, and the Independent Authority for Spanish Fiscal Responsibility (AIREF) expects the regional deficit to broaden slightly to 0.3% of GDP in 2025. The regional government's prudent budgeting behaviour and continuous dynamic development of tax revenues in the region will mitigate the adverse financial consequences of these investments. Additionally, Madrid is a net contributor to the regional equalisation funds; therefore, Madrid will contribute a bit less to the rest of regions under lower tax revenue generation, which was a consequence of an economic slowdown.

Morningstar DBRS takes a positive view on the improvement in financial performance and believes that Madrid has some budgetary flexibility that could be used against potential fiscal headwinds. This is also the case with the revenues recovered from the wealth tax in 2024; this had a tax benefit in previous years, with tax collection estimated at EUR 560 million per year, and there are more taxes that the region could put in place in case of financing need.

The region's plan to continue its capital investment efforts will reinforce the importance of expenditure control in the near term. This is particularly the case in 2025 because of the much lower settlement from the regional financing system, Next Generation EU (NGEU) funds and REACT-EU funds Madrid is due to receive; however, the region expects to manage its deficit in the coming years and achieve progress towards a balanced budget in 2028, although AIREF expects this to happen in 2029. In order to reach this goal, tighter expenditure control will remain a key credit consideration given the lower economic growth context.

Madrid's Debt Burden Continues to Decrease while Pioneering Use of Green Debt Helps the Region's Reputation in the Markets

Madrid increased its debt stock in 2024 because of its own deficit but the debt of its government-related entities slightly decreased. At the end of 2024, Morningstar DBRS' adjusted debt stock increased to EUR 40.3 billion from EUR 39.7 billion at the end of 2023. However, Madrid's debt ratios improved, with adjusted debt-to-operating revenue decreasing to 151% at YE2024 from 169% at YE2023. Excluding the debt metrics seen in 2020 and 2021, which greatly improved thanks to extraordinary revenues from state support, this is the lowest value over the last 10 years. In its May 2025 medium-term forecast report on the Financial Stability Plan, AIREF predicts the debt ratio will keep decreasing towards 10% in 2029 and expects this ratio to keep declining over the long term towards 7% of GDP in 2040.

Moreover, Madrid's debt could potentially decrease further in the medium term if the national government keeps its commitment to providing debt relief to the regions. So far, the measure has been announced and discussed at the Fiscal and Financial Policy Council with details published on the calculation method of this debt relief, which for Madrid would amount to approximately EUR 8.6 billion. However, there is still uncertainty over the timing of this measure since the Ministry of Finance has deemed it necessary to issue an organic law to articulate the debt relief, in order to prevent any misapplication of the budget stability law and to prevent any alternative interpretation of the scope of responsibilities of the current regional financing system.

Additionally, the region is committed to maintaining part of its funding needs via sustainable and green bond schemes, with the latest sustainable bond issuance in February 2025 for EUR 1 billion. The region uses sustainable bond schemes, which are issued to fund a combination of projects related to social development or environmental benefits and green bonds. As of May 2025, Madrid was among the first regions to be certified to comply with the EU green bond standards, which are considered as the new gold standard in this field. The use of this funding enhances diversification and secures Madrid's ability to tap the markets; this likely contributes to the region benefitting from a long average life of debt at 8.2 years as of YE2024, which is much higher than the average for Spanish autonomous communities, and an average cost of debt rate at 2.27% as of same date.

For 2025, almost all of Madrid's funding needs were financed in the first half of the year, with EUR 2.8 billion financed through a mix of bond issuances, private placements, and bank loans. There is still EUR 500 million pending financing; however, Madrid could cover part of it through its liquidity toolkit or recourse to preapproved long-term loans for specific investments available from multilateral institutions, such as a loan of EUR 372 million from the European Investment Bank for the extension of the first section of line 11 of Madrid's metro. Morningstar DBRS takes the view that Madrid's set-up and successful launch of a commercial paper programme in 2020 and the extension of the credit lines available to the region to EUR 1.8 billion, bringing the region's liquidity toolkit to EUR 2.8 billion, have strengthened its liquidity profile overall.

High Employment and EU funds Support Madrid's Strong Economic Performance

Madrid had a population of approximately 6.9 million and a GDP estimated at around EUR 291 billion at the end of 2023, which is the largest regional economy in Spain, representing close to 20% of Spain's GDP. In 2023, Madrid's real GDP grew by 2.5%, slightly lower than Spain's growth rate of 2.7%. Although the region's growth is usually higher than the national growth rate, AIREF expects Madrid's real GDP to have grown by 3.2% in 2024, in line with national growth. Morningstar DBRS expects the regional economy to continue growing thanks to its high employment level, resilient internal demand, and investment that is benefitting somewhat from a slight pick-up in the construction sector. The financial resources expected from NGEU, including the Recovery and Resilience Facility and REACT-EU funds, should continue to support reforms and investments. Additionally, Madrid is the largest recipient of foreign investment funds in Spain, with almost 50% of the national total, which should positively influence the regional economy's prospects.

Over the last three years, the region has benefitted from strong growth in employment that led to record levels of around 3.8 million workers, with a growth that, despite now slowing down, continued to grow by 2.6% annually until April 2025. The vast majority of these jobs are in the service sector, within which there has been particularly high growth in the tourism, financial and insurance, and information and technology sectors over the last three years. These sectors are labour intensive and often have a high value added, which explains both the strong growth in employment and why the region benefits from the highest GDP per capita in the country, estimated at EUR 42,383 in 2023, 39% above the national average. At the same time, the unemployment rate stood at 9.1% at Q1 2025, down from 9.2% at Q1 2024, and is lower than the overall unemployment rate in Spain.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Social (S) Factors

The following Social factor had a relevant effect on the credit analysis: Passed-through Social considerations.

The Passed-through Social credit considerations had a relevant effect on the credit ratings, as the social factors affecting the Kingdom of Spain's credit ratings are passed-through to Autonomous Community of Madrid.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

Credit rating actions on Kingdom of Spain are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Autonomous Community of Madrid are discussed separately at https://dbrs.morningstar.com/issuers/15664.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196.

RATING COMMITTEE SUMMARY
Morningstar DBRS' European Sub-Sovereign Scorecard generates a result in the AA (low) to "A" range. The main points discussed during the Rating Committee included the fiscal and debt evolution in 2024, the economic situation in the region and its outlook, and its financial forecasts.

For more information on the Key Indicators used for the Kingdom of Spain, please see the Sovereign Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/455417.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Rating European Sub-Sovereign Governments (9 August 2024), https://dbrs.morningstar.com/research/437618. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025), https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include the Autonomous Community of Madrid for financial and budgetary positions and debt structure from 2016 to 2024, Madrid's Investor Presentation, Bank of Spain for the debt stock between 2016 and 2024, AIREF's "Medium-Term Forecasts Over the Follow-Up of the Financial Stability Plan" (May 2025) and its "2025 Initial Budget for Autonomous Community of Madrid" (April 2025), Instituto Nacional de Estadistica (INE), Ministry of Finance, General State Comptroller (IGAE). Other sources include the Spanish national statistical agency, central bank, and ministry of finance; International Monetary Fund; and World Bank. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/455807.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jorge Espinosa, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Global Sovereign Ratings
Initial Rating Date: 1 February 2019
Last Rating Date: 13 December 2024

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