Fitch Affirms City of Rennes at 'AA'; Outlook Stable

Thu Dec 19, 2013 11:43am EST

PARIS, December 19 (Fitch) Fitch Ratings has affirmed the City of Rennes's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable. The agency also affirmed Rennes's EUR200m EMTN programme's long-term rating at 'AA' and its short-term rating at 'F1+'. KEY RATING DRIVERS The ratings of the City of Rennes are underpinned by its track record of sound operating performance, moderate indebtedness, sound governance and its strong economy. The Stable Outlook reflects Fitch's view that, despite expected weakening for the next three years, both performance and debt metrics will remain compatible with the current ratings. Fitch estimates the operating margin to have weakened in 2013 to a still comfortable 15.6%, mostly due to sluggish indirect tax revenue. We expect the operating margin to decline to about 13% by 2016, as cuts in state transfers will weigh on operating revenue. Enhanced cost control should moderate operating expenditure growth but not enough to fully offset the revenue slump. Rennes's financial flexibility mostly rests on its tax-raising ability, as local tax pressure is moderate compared with other major French cities. However, our forecasts do not envisage any tax hikes for the next three years. Capital expenditure net of self-financing is high, amounting to 79% on average since 2008. We forecast a sustained level of capital expenditure of EUR80m per year until 2016, amid a weakening of the city's self-financing capacity. This should lead to an increase of debt. Direct debt is moderate and is expected by Fitch to account for 51% of current revenue at end-2013. The debt payback ratio should remain sound at 3.5 years, while debt servicing is largely covered by the operating balance. Debt structure is sound and does not include high-risk structured products. We expect debt to increase to 58% of current revenue by end-2016, with a debt payback ratio of five years. Liquidity is sound and backed up by adequate revolving and short-term credit lines. Debt guarantees are high, totalling at EUR182m at end-2012. They are on a downward trend and mostly for regulated social housing entities. Rennes's public sector entities are fully self-funded and do not bear significant amount of debt. Rennes benefits from a stable political context and sound governance, with a high level of integration with its inter-municipal grouping, Rennes Metropole (AA+/Stable/F1+). We believe Rennes's ability to implement its medium-term financial strategy is underpinned by its skilled administration and prudent financial management. Despite a challenging industrial restructuring, Rennes's economy remains dynamic, well diversified, and displays structurally below-average unemployment. Economic growth prospects are underpinned by a young, highly qualified population, low real-estate prices and outstanding public infrastructure. RATING SENSITIVITIES A positive rating action could be triggered by a stable operating margin and a sustained decrease of the direct risk payback ratio to under four years. A consistent weakening of operating performance resulting in the direct risk payback ratio of more than nine years on a sustained basis could result in a negative rating action. Contact: Primary Analyst David Lopes Associate Director +33 1 44 29 91 45 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Arnaud Dura Associate Director +33 1 44 29 91 79 Committee Chairperson Vladimir Redkin Director +7 495 956 7064 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 9 April 2013 on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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