TEXT-Fitch Assigns 16 French Public Hospitals' joint bond issue 'AA' final rating

Wed Feb 13, 2013 8:04am EST

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(The following statement was released by the rating agency)

Feb 13 - Fitch Ratings has assigned a joint bond issue made by 16 regional public hospitals in France a final 'AA' Long-term local currency issue rating. This is the third transaction of a pool of French public hospitals and the first one rated by Fitch. The amount of the issue is EUR228m, maturing on 14 February 2023. Each hospital has a different share of the total bond issue, ranging from 2% to 15%.

RATING RATIONALE

Given the absence of cross-repayment obligations, credit enhancement or liquidity reserves in the bond structure, the entire bond issue would default if any one of the joint issuers failed in its obligations. Fitch considers a joint bond issue that does not provide mutual support or solidarity mechanisms among the different obligors, or collateral backing as dependent on the weakest participant.

To rate the bond, Fitch has applied its public sector entity criteria to assess each of the 16 hospitals. They all have the status of Etablissement Public (public entity) and as such benefit from a protective status and cannot be liquidated. The French state reinforced its ties with public hospitals in 2009 by changing their legal status from a local to a national public establishment. In addition, Fitch considers that, through the creation of the Regional Healthcare Agencies (ARS) in 2009, the central government has increased its control, particularly in terms of development of strategy and financial monitoring, over French public hospitals. The 16 regional hospitals participating in the joint bond issue are large and Fitch considers that due to the strategic importance of regional hospitals, the support they may receive from the state is stronger than for other hospitals. The 16 public regional hospitals are Besancon, Bordeaux, Clermont, Dijon, Grenoble, Lyon, Marseille, Metz, Montpellier, Nancy, Nice, Nimes, Poitiers, Rouen, Saint Etienne and Toulouse.

The 16 hospitals participating in this transaction reported current revenue in aggregate of EUR10.8bn in 2011, of which around 88% came from central governmnent.. They employ around 150,000 staff and have close to 33,000 beds. The 16 hospitals generated an average operating margin (exluding depreciation) of around 6% and their financial debt, excluding long-term revolving loans, amounted to EUR4,998m at end-2011. This was equivalent to 46% of their aggregate revenue, although the percentage by hospital ranges from 1.6% to around 91%. Since 2011, any hospital whose debt level exceeds targets needs to seek approval in advance from its ARS.

Liquidity has been a source of concern for the French public hospitals, which is mainly due to the timing of funding by the central government. While commercial creditors are in most cases paid within the legal limit of 50 days, public hospitals have seen their current assets increase, which has translated into pressure on liquidity. A large number of public hospitals have contracted lines of credit (long and short term). The central government has reinforced its monitoring of the sector's financial performance and in some cases provided temporary liqudity support. In September 2012, the government established a special committee to scrutinise the liquidity of any hospital deemed to be facing problems, and the hospital concerned will have to submit three months' cash flow projections.

RATING SENSITIVITIES

A downgrade of the issue rating could result from a downgrade of the sovereign rating as Fitch considers the rating of the joint bond to be linked to the Issuer Default Rating of the French Republic ('AAA'/Negative). A downgrade could also result from a dilution of the hospitals' legal status or control from the central govenrment.

KEY ASSUMPTIONS

The ratings are sensitive to a number of assumptions.

- Fitch assumes that the reinforcement on liquidity monitoring and that the amount of reserves from the central government would be enough to cover any potential liabilities from those hospitals.

- Fitch assumes that no change on the status of PHE and that implicit guarantee from central government remain in place. \

- Fitch also assumes no change in the funding model of hospitals.

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