Fitch Affirms Region of Bretagne at 'AA'; Outlook Stable

Fri Jun 6, 2014 11:35am EDT

(The following statement was released by the rating agency) LONDON/PARIS/MILAN, June 06 (Fitch) Fitch Ratings has affirmed the Region of Bretagne's Long-term local and foreign currency Issuer Default Ratings (IDRs) at 'AA' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable. KEY RATING DRIVERS The ratings of the region of Bretagne are underpinned by its strong budgetary performance, low debt, and sophisticated management. The ratings also take into account an expected surge in debt due to sizeable capital expenditure until 2017. The Stable Outlook highlights Fitch's view that despite growing budgetary pressure the region is likely to keep debt metrics in line with the ratings. The region's operating margin was comfortable at 27.1% in 2013, notably due to steady tax revenue growth. Fitch expects operating margin to fall to 21% by 2017, because of a decrease in operating revenue (-1.6% per year until 2017) linked to strong cuts in state transfers (EUR60m per year until 2017). Operating expenditure growth is expected by Fitch to slow down to 0.5% per year, from 3% in 2013, provided the region offsets dynamic spending (staff, train services, education) with structural spending cuts. Capital expenditure will rise to EUR487m per year between 2014 and 2017, from EUR372m per year since 2009. The region co-finances the regional high-speed railway system and purchases train rolling stock, while maintaining capital programmes in other areas. Combined with a weaker current margin, this rise in capital expenditure will result in a lower self-financing rate, of 48% on average after debt repayment, from 2014 to 2017, from an average 82% since 2009. Debt was moderate at EUR434m at end-2013 or 43.3% of current revenue, but Fitch expects it to surge to 132% of current revenue by 2017 owing to the decline in self-financing capacity and the rise in capital spending. We expect debt service coverage to remain comfortable, but the debt payback ratio should rise to 7.7 years at end-2017 from 1.6 years at end-2013. Bretagne has a track record of reliable financial forecasting, owing to a modern budgetary framework. Fitch believes this underpins the region's ability to adapt to the expected fall in revenue and allows the implementation of its budgetary strategy. Fitch expects the profile of French regions to evolve significantly as the government intends to increase their size by promoting mergers and broadening their competencies. Fitch is monitoring this development and will eventually factor it into its forecasts. Bretagne's diversified economy relies on an important agricultural and food processing sector, and on a strong industrial base. Its unemployment rate is structurally below the national average, due to a skilled workforce. We expect the regional economy to recover in line with the French economy despite difficult industrial restructuring and a lack of competitiveness in some key economic sectors. RATING SENSITIVITIES The inability to adjust expenditure to match revenues, leading to a debt payback ratio consistently above seven years, could lead to a negative rating action. A strong budgetary performance resulting in debt payback ratio sustainably below two years could lead to a positive 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 Olivier Jacques Associate Director +33 1 44 29 91 89 Committee Chairperson Raffaele Carnevale Senior Director +39 028 79 08 72 03 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 23 April 2014 on www.fitchratings.com. 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