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Fitch Affirms Region of Bretagne at 'AA'; Outlook Stable
December 6, 2013 / 4:42 PM / 4 years ago

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

PARIS/BARCELONA, December 06 (Fitch) Fitch Ratings has affirmed the Region of Bretagne's Long-term local and foreign currency ratings at 'AA' and its Short-term foreign currency rating at 'F1+'. The Outlook is Stable. KEY RATING DRIVERS The ratings are based on the region's strong budgetary performance, low debt, and sophisticated financial management. The ratings also factor in a steep rise in debt due to high capital expenditure until 2016 amid a weaker self-financing capacity. The Stable Outlook highlights Fitch's opinion that the current financial profile will be maintained and that the region will manage its indebtedness at levels that are compatible with the ratings. Fitch estimates that the operating margin should have improved in 2013 to 27.6% due to the moderate pace of expenditure, a healthy tax base and the recognition of deferred revenue items. Its current margin of 26.8% is high compared with peers. Budgetary flexibility is low, however, due to limited tax leeway and largely inflexible expenditure (staff, mandatory transfers, multiyear contracts). Fitch expects operating performance to deteriorate through to 2016 and the current margin to fall to 21%. This is mostly due to a decline of revenue caused by cuts in state transfers. Operating expenditure is likely to grow modestly by 1.2% per year until 2016, provided the region offsets dynamic spending items (staff, train services, education) with curbs on its most flexible expenditure. We expect a sizeable rise in capital expenditure, as Bretagne will co-finance the regional high-speed railway system and invest in harbour infrastructure, while maintaining capital programmes in other areas. This will push up average annual capital expenditure to EUR526m between 2013 and 2016 from EUR346m since 2008. A weaker current margin and rising capital expenditure will result in a much lower self-financing rate, of 55% on average after debt repayment, from 2013 to 2016, from an average 93% since 2008. Debt is low but is likely to have risen in 2013 to 44.4% of current revenue due to growing capital expenditure. Fitch expects debt to surge to 111% of capital revenue by 2016 owing to a weaker self-financing capacity and increased capital spending. We expect debt service coverage to remain comfortable, but the debt payback ratio should deteriorate to 5.3 years at end-2016 from 1.7 years at end-2013. Main economic indicators (unemployment, GDP per capita) are better than the national average, due to a well-diversified economy, skilled workforce and strong population growth. Difficult restructuring of key sectors (automotive, agro industries) have recently led to an accelerated deterioration of the economy in some areas, notably those most dependent on particular sectors or companies. The region has a track record of reliable financial forecasting, owing to a modern budgetary framework. Fitch believes this underpins the region's ability to anticipate adverse developments and to help ensure that its medium-term financial targets are met. RATING SENSITIVITIES Inability to adjust expenditure to match revenues, leading to a debt payback ratio consistently above seven years, could result in a downgrade. A strong budgetary performance resulting in debt metrics significantly outperforming our expectations could lead to an upgrade. 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 Guilhem Costes Senior Director +34 9 33 23 84 10 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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 Applicable Criteria andALL 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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