Fitch Affirms Rennes Metropole at 'AA+'; Outlook Stable

Fri Apr 4, 2014 11:35am EDT

(The following statement was released by the rating agency) PARIS, April 04 (Fitch) Fitch Ratings has affirmed Metropolitan Community of Rennes, Rennes Metropole's (RM) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA+' and its Short-term foreign currency IDR at 'F1+'. The Outlooks on the Long-term IDRs are Stable. The ratings are underpinned by RM's continued solid performance, low debt, robust socio-economic profile, and skilled management of its finances. The ratings also reflect an expected significant, but manageable, increase in debt in the coming years related to a new metro line. The Stable Outlook factors in RM's capacity to maintain a sound budgetary performance over the medium term. KEY RATING DRIVERS According to preliminary results, RM reported a strong current margin of 30.4% of current revenue at end-2013. RM's strength lies in its capacity to maintain a sound budgetary performance over the medium term, as revenue flexibility is sufficient to offset most of the expected decline in state transfers and higher interest expenses linked to debt growth. The current margin should therefore remain confortable and average 27% from 2014 to 2016. Debt is moderate relative to peers at 20.3% of current revenue in 2013, leading to a confortable debt payback ratio of 0.7 year. Debt management is prudent with low exposure to interest rate risk. Liquidity is underpinned by predictable cash flows and, according to preliminary results, RM achieved a structural cash surplus of EUR156.7m at end-2013, which was sufficient to cover debt servicing by over 14x. This amount has been built up in recent years to ensure self-financing of capital expenditure until 2015. The construction of a second metro line scheduled for completion in 2018 should bring capital spending to EUR347m per year on average from 2014 to 2016. Self-financing of capital expenditure, after debt repayment, could therefore decline to 54% during this period, from 99% in 2013. Fitch forecasts a sharp increase in debt, which may reach 87% of current revenue by end-2016. Its debt payback ratio would then weaken to 3.1 years. However, Fitch points to RM's positive track record for its first metro line in 1997-2002, which demonstrated tight control of indebtedness and subsequent rapid de-leveraging. Guaranteed debt was high, and stood at 177% of current revenue at end-2013, according to preliminary results. Fitch considers it as low risk as it essentially comprises long-term regulated loans extended to state-monitored social housing entities. Debt of public sector entities is low. Despite a challenging overhaul of the industrial sector, RM's economy remains dynamic, well-diversified, and enjoys a structurally below-average unemployment rate. Economic growth prospects are underpinned by a young, highly qualified population, low real-estate prices and strong public infrastructure. RM benefits from sound governance and is deeply integrated with its main constituent city, Rennes (AA/Stable/F1+). An advanced financial management framework underpins RM's capacity to effectively implement its financial strategy. RATING SENSITIVITIES A deterioration of RM's budgetary performance and its self-financing capacity, leading to a worsening of debt ratios (e.g., direct risk payback ratio of over four years for more than two consecutive years) could lead to a downgrade. An upgrade may result from lower-than expected increase in debt, provided the sovereign rating (France, AA+/Stable/F1+) is also upgraded. 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 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 9 April 2013 on www.fitchratings.com. 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