Fitch Affirms Department of Puy-de-Dome at 'AA'; Outlook Stable

Fri Mar 21, 2014 1:05pm EDT

(The following statement was released by the rating agency) PARIS, March 21 (Fitch) Fitch Ratings has affirmed Puy-de-Dome's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA'. The Short-term foreign currency IDR has been affirmed at 'F1+'. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary. KEY RATING DRIVERS Puy-de-Dome's ratings reflect its sound operating performance, moderate debt levels, and a robust socio-economic profile. They also factor in Fitch's expectations of continuing deterioration in the department's financial performance and debt metrics. According to preliminary results the department's operating and current margins in 2013 remained comfortable at 13.6% and 12.3% respectively. However, Fitch expects the current margin to weaken in the medium term, to about 6.1% in 2017, despite the introduction of national compensation resources for departments from 2014. This is based on the assumption of further cuts in state transfers after 2015 which, combined with growing social spending, could accelerate the deterioration in the department's financial profile. Puy-de-Dome's budget shows limited flexibility, as 74% of operating revenue is based on non-modifiable taxes and state transfers, and operating expenditure is driven by rigid items such as staff costs, mandatory transfers and social spending. Although the department demonstrates a tight control over costs and discretionary spending, Fitch considers the remaining leeway on expenditure to be insufficient to fully offset the expected decline in resources. However, the department's remaining tax flexibility on property tax is a positive rating factor, though there is a commitment to not change tax rates over the medium term. Direct debt is expected to have reached EUR328.5m or 54.4% of current revenue at end-2013, a moderate level compared to peers. The debt payback ratio remained confortable at 4.4 years. Debt structure is sound and does not include high-risk products. Declining current margins should lead to a weaker capacity to self-finance capital expenditure. The self-financing rate, after debt repayment, should decrease to less than 50% (from slightly below 60% on average in 2010-2013) despite lower capital expenditure following cuts to budgetary commitments. This should push debt higher to 64% of current revenue by 2017, resulting in a debt payback ratio of about 10.5 years. Liquidity is underpinned by the strong predictability of cash flows and by ready access to short-term funding. The latter is based on regular issuance of billets de tresorerie (BT) under a EUR100m programme, backed up by adequate committed bank credit lines. Liquidity forecasts are detailed and updated on a regular basis. Fitch considers that the department's track record of reliable financial forecasting and operational modernisation will help contribute to its ability to implement its medium-term financial strategy. Despite a high level of contingent liabilities, Fitch considers risk as low due to solid borrower profiles (fire services, social housing institutions) and a sound overall debt structure. A sophisticated monitoring framework and strict eligibility guidelines implemented by management are a positive factor. RATING SENSITIVITIES A deterioration of operating performance leading to an operating margin consistently below 10% or a debt payback ratio consistently of 10 years or above could justify a negative rating action. Sustained improvement of operating performance leading to a debt payback ratio consistently below 3 years could lead to an upgrade. The rating actions are as follows: Long-term foreign and local currency IDRs: affirmed at 'AA'; Outlook Stable Short-term foreign currency rating: affirmed at F1+ EUR500m EMTN programme: affirmed at 'AA'/'F1+' EUR100m BT programme: affirmed at 'F1+' Contact: Primary Analyst Olivier Jacques Associate Director +33 1 44 29 91 89 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst David Lopes 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 2013, "International Local and Regional Governments Rating Criteria outside United States", dated 17 August 2012 on www.fitchratings.com. Applicable Criteria and Related Research: International Local and Regional Governments Rating Criteria here Tax-Supported Rating Criteria here Institutional Framework for French Subnationals here Interpreting the Financial Ratios in International Public Finance Reports - Amended here Additional Disclosure Solicitation Status here ALL 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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