Fitch Affirms Department of La Manche at 'AA-', Outlook Stable

Fri Mar 14, 2014 12:36pm EDT

PARIS, March 14 (Fitch) Fitch Ratings has affirmed Department of La Manche's Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'AA-' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable. KEY RATING DRIVERS La Manche's ratings reflect its sound budgetary performance, in line with 2012's levels, and its moderate debt. The Stable Outlook reflects that despite expected moderate weakening in both its performance and debt metrics, these ratios would remain compatible with the current ratings, due to financial leeway, notably in capital expenditure. La Manche's current margin remained comfortable in 2013 at 15.7 %, based on higher-than- expected revenue and operating expenditure restraint. Fitch expects the department's operating performance to weaken, with the operating margin dropping to about 13% in 2016 due to sluggish revenue and rising operating expenditure, particularly in social spending. Over the medium term, management's aim is to improve the match between operating revenue and operating expenditure, with a minimum operating balance of EUR60m. La Manche's budget shows limited flexibility, as operating revenue is mostly based on non-modifiable taxes and state transfers, and operating expenditure is driven by rigid items such as staff costs, mandatory transfers and state-defined social spending. However, there is some budgetary flexibility stemming from Manche's direct tax leeway - even if department is committed to leaving tax rates unchanged - and from possible shrinkage in current departmental transfers, allowing La Manche to concentrate on its core competencies. At end-2013, La Manche's self-financing capacity (SFC; current balance plus capital revenue) remained stable at about 98% of capital expenditure. With an average annual capital expenditure of EUR83m, Fitch expects SFC to decline to about 83% in 2016. Fitch believes La Manche has some leeway in capex as about 20% is still in arbitration. Direct debt was moderate in 2013 at EUR332.6m with an average maturity of seven years and a debt payback ratio of 5.4 years. Debt is actively and securely managed as 74% is fixed-rate. The department aims to keep the debt payback ratio below six years through to 2016. However, Fitch estimates that the debt payback ratio could reach a maximum of nine years in 2016, which will put the rating under pressure. Although the structure of the local economy is less sensitive to national economic fluctuations than other regions, it does not generate high added-value. The population's wealth is below the national average while the wealth of the elderly population is slightly above it. In 3Q13, the unemployment rate (9.1%) was lower than the national average (10.4%). This should result below-average social spending for the department compared with others. Although the amount of guaranteed debt is high in absolute terms (EUR266m), Fitch considers risk related to guaranteed debt as low as they are mostly for the benefit of low-risk regulated social housing entities. RATING SENSITIVITIES A downgrade could result from La Manche's inability to control its operating expenditure and adjust its capital expenditure to its SFC, which will result in a debt payback ratio above 10 years. An improvement or stabilisation of the current margin for several consecutive years, leading to solid debt coverage ratios, combined with controlled capital expenditure, could lead to an upgrade. Contact: Primary Analyst Arnaud Dura Associate Director +33 1 44 29 91 79 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Olivier Jacques Associate Director +33 1 44 29 91 45 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 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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