The main factors considered in this report were the archipelago’s economic situation, their financial performance, liquidity, debt metrics, the financial situation of the regional airline and its potential impacts on the Azorean credit profile, and the relationship between the Azores and the central government in Lisbon.

According to DBRS Morningstar, the credit core assessment for the Azores was mainly shaped by “the regional government’s willingness to consolidate its public finances in coming years in order to progressively bring back its operating performance to the sound level reached prior to COVID-19; a high debt ratio which increased noticeably during 2020-2022 but is expected to start improving from 2023, and the region’s geographical location as an archipelago in the Atlantic Ocean, classifying it as an outermost region in the European Union (EU) which reinforces its relationship with Portugal (rated A, Stable) as well as the support stemming from the national government.”

“The Stable Trend reflects DBRS Morningstar’s view that risks to the ratings are balanced,” the company stated. Hospitality’s growth over 2022 and 2023 has led to higher tax revenues which will help the islands shore up their finances over the next few years. Nevertheless, the report reminds that “the region’s financing deficit remained high in 2022 and the fiscal rebalancing in 2023 is likely to be weaker than expected.” The growing tourism industry also helps the regional airline, SATA Group, who have recovered their financial performance but still recorded losses. “In the first half of 2023, the number of passengers carried by the company continued to increase rapidly which should support its turnover and help mitigating the region’s potential risks related to the airline.”

“The Azores’ budgetary performance slightly improved in 2022 but has remained well below the level seen prior to the COVID-19 pandemic,” the report assessed. From 2015 to 2019 the average operating results-to-operating revenues ratio was 8.5%. In 2020 it dropped to -5.7%, in 2021 -5.6%, and -3.5% in 2022. “The very large budgetary shortfalls in the last three years were mainly due to COVID-related higher expenditures, particularly in healthcare, education and support to the regional economy.” DBRS Morningstar has praised the initial 2023 budget as a step towards the region rebalancing its accounts.

The Azores’ adjusted debt stock, including direct, indirect and guaranteed debt, as calculated by DBRS, “has reached 331% of the region’s operating revenues at the end of 2022, versus 241% at the end of 2019.” This comes down to the large deficits over the last three years and the financial issues with SATA.

The report commends the changes implemented to re-centralise a portion of the region’s companies’ debts to their own possession. “These operations were concomitant with the dissolution of several regional companies,” DBRS stated. “This re-centralisation of public services should enhance the region’s control over service provision and rationalise some of the related costs, especially concerning debt service.”

“On the economic front, the region has benefited from a strong recovery of the hospitality sector since 2022. Overnight stays in 2022 exceeded their 2019 level by 8% and showed a lower level of seasonality throughout the year,” the assessment admitted. “This favourable trend continued in 2023 as overnight stays between January and May 2023 were 14% above their 2019 level.” This growth in the industry has allowed for more job positions to open, reducing the unemployment rate to 6.2% in Q1 2023, 1% lower than the national average. To compare, in 2015-2019 it was at 10% on average. DBRS will also keep a lookout for additional funds heading to the Azores from Brussels and Lisbon, including €580 million in Recovery and Resilience Facility grants.

“The positive momentum of the tourism sector is also supporting the turnover of SATA, contributing to mitigate the region’s potential risk related to the airline, following the approval by the European Commission (EC) in June 2022 of €453 million in restructuring aid to SATA to support the company’s restructuring plan,” according to DBRS Morningstar, including an extra €135 million guarantee on SATA’s debt funding until 2028. “The restructuring plan includes operational-efficiency measures and the divestment by SATA of its controlling shareholding (51%) in its subsidiary and international routes’ arm, Azores Airlines, which was historically accounting for the largest share of the airline group’s losses. The international public tender for the divestment of Azores Airlines was launched in March 2023.” DBRS Morningstar considers the aid provided by the EC to have reduced the region’s risks of losing credit score, as SATA had many short-term debts largely guaranteed by the regional government.

“While the Azores does not benefit at the moment from any debt guarantee from the central government, DBRS Morningstar takes the view that any assistance previously and currently provided to Madeira by the Portuguese government would be available also to the Azores if ever necessary,” the analysis team theorised. “This assessment is supported by the fact that the region benefited from the central government’s debt financing in 2012, at the peak of the European sovereign debt crisis, and that the State Budget Law for 2023 gives the possibility to the central government of granting guarantees to the two Portuguese autonomous regions.”

According to DBRS, the Azores’ ratings can be improved if any of the following were to happen: “the region materially reduces its indebtedness and risk exposure to loss-making regional companies; Azores’ economic outlook outperforms current expectations; there are indications of a further strengthening of the relationship between the region and the central government; or the Portuguese sovereign rating is upgraded.”

Adversely, the rating can be brought down if “SATA’s, or other regional companies’, financial and liquidity profiles deteriorate, prompting guarantee calls or a marked weakening of the region’s already high debt metrics; the region fails to consolidate its financial performance prompting a substantial and structural rise in its debt ratio; indications that the relationship between the region and the central government would be weaker than currently considered; or the Portuguese sovereign rating is downgraded.”

While there are no Environmental or Governance factors that go into this rating, according to DBRS Morningstar, the Portuguese Republic’s Social ratings are passed through to the Azores, and “have a relevant effect on the ratings.”