Fitch Affirms Department of Bouches at 'AA'; Outlook Stable

Fri Apr 4, 2014 11:35am EDT

(The following statement was released by the rating agency) PARIS/MILAN, April 04 (Fitch) Fitch Ratings has affirmed Department of Bouches du Rhone's Long-term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AA' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable. Its EUR500m senior unsecured bonds have been affirmed at 'AA'. KEY RATING DRIVERS Bouche du Rhone's ratings reflect its sound budgetary performance, in line with 2012's levels, and its low 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. Direct debt was low in 2013 at EUR359.3m or 16.3% of current revenue, with an average maturity of seven years and a debt payback ratio of 1.2 years. Debt is actively and prudently managed with 54.5% at fixed-rate. Bouches du Rhone aims to maintain its debt payback ratio below five years through to 2016. Despite a high level of investments of EUR550m per year planned over 2014-2016, Fitch estimates that the department should be able to comply with its debt payback target in the medium term. Fitch expects Bouche du Rhone's current margin would have remained comfortable in 2013 at 14%, based on higher-than-expected revenue and operating expenditure restraint. The agency expects the department's operating performance to weaken, with the operating margin dropping to about 10% in 2016, due to sluggish revenue on expected cuts of state transfers and rising operating expenditure, particularly in social spending. Over the medium term, the department aims to maintain a current balance above EUR200m. Bouche du Rhone'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 possible shrinkage in current departmental transfers, allowing Bouches du Rhone to concentrate on its core competencies. At end-2013, Bouche du Rhone's self-financing capacity (SFC) slightly declined to about 75% of capital expenditure, following a slight decline of current balance and an increase of capital expenditure. Fitch expects the department's SFC to decline further to 47% in 2016, but we believe that Bouches du Rhone has some leeway in capex as about 60% corresponds to capital transfers being made. The department has a lower-than-average socio-economic profile. In 3Q13, the unemployment rate (12.7%) was higher than the national average (10.4%), which means the department has higher social expenditure than others. Its high level of debt guarantees (EUR1,048m at end-2013) is mostly related (about 90%) to social housing institutions, which are strictly monitored and regulated by the state. Fitch considers the main dependent public sector entities (fire services and social housing institutions) to be low-risk. RATING SENSITIVITIES A downgrade could result from Bouche du Rhone's inability to control its operating expenditure and adjust its capital expenditure to its SFC, which would result in a debt payback ratio above eight years. Positive rating action could result from an operating margin above 20% and an improvement in the department's socio-economic profile. 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 David Lopes Associate Director +33 1 44 29 91 45 Committee Chairperson Raffaele Carnevale Senior Director +39 02 07 90 87 203 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 and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria here Institutional Framework for French Subnationals 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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