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

Fri Jul 25, 2014 12:05pm EDT

(The following statement was released by the rating agency) PARIS/FRANKFURT/LONDON, July 25 (Fitch) Fitch Ratings has affirmed the Department of Savoie's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' with Stable Outlooks and its Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS The ratings of the Department of Savoie's are underpinned by its track record of sound operating performance, moderate indebtedness, strong governance and its robust economy. The Stable Outlook reflects Fitch's view that despite expected weakening, both performance and debt metrics will remain compatible with the current ratings. The operating margin has been on average at a comfortable 18% of operating revenue since 2009, but is expected to weaken to about 10% in 2017 in Fitch's base case forecast. This is due to the impact of announced State transfers cuts, which should reduce revenue on average by 0.4% per year. Spending is forecasted to grow by 1.8% per year due to the implementation of spending cuts and reforms. Despite its high level of capital expenditure, Savoie has achieved an average net self-financing rate (after debt repayment) of 67% since 2009. We expect self-financing to decline in the future due to a lower current balance. This should, however, be limited by a gradual scaling-down of capital expenditure, to about EUR88m per year from EUR97m in 2013. Savoie'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 Savoie's direct tax leeway and its ability to scale back non-mandatory policies and cut costs. We believe the department's ability to implement its comprehensive cost-cutting plan is underpinned by its strong governance, based on a skilled administration, a stable political context, and a track record of prudent financial management. Debt was moderate at 61% of current revenue at end-2013, and is expected to rise to 71% of current revenue in 2017. Debt coverage metrics are comfortable, with a sound debt payback ratio of 3.7 years at end-2013 and strong debt service coverage. Fitch forecasts debt payback to weaken to about eight years in 2017, due to a lower current balance. Debt guarantees were high at EUR480m at end-2013. However, they are mostly for low-risk regulated social housing entities. Dependent public-sector entities are fully self-funded and well capitalised. Savoie's socio-economic indicators are better than the national average, with notably lower unemployment (7.6% at end-2013) and slightly higher average wealth (GDP per capita of 110% of EU average in 2010). It benefits from a dynamic tourism industry, driven by some of Europe's leading ski resorts, although it also results in some concentration risk. RATING SENSITIVITIES A weak operating performance leading to a debt payback ratio consistently above 10 years could result in a downgrade. Although Fitch considers it unlikely, an upgrade could result from a sustained improvement in the operating performance leading to considerably stronger debt metrics. 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 Guido Bach Senior Director +49 69 768076 111 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 24 April 2014 on www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States 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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