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Fitch Affirms 16 French Public Hospitals' Joint Bond Issue at 'A+'
November 29, 2016 / 5:15 PM / 10 months ago

Fitch Affirms 16 French Public Hospitals' Joint Bond Issue at 'A+'

(The following statement was released by the rating agency) PARIS, November 29 (Fitch) Fitch Ratings has affirmed the rating on the joint bond issue by 16 French public regional hospitals (CHU3) at long-term local currency senior unsecured 'A+'. The bond was the third issue from a group of French public hospitals and the first rated by Fitch. The EUR228m bullet bond, which matures on 14 February 2023, was issued to finance the hospitals' investments. The bond represents an unsecured and unsubordinated obligation of each obligor. Each hospital's share of the total bond issue ranges from 2% to 15%. KEY RATING DRIVERS The joint bond issue does not have a solidarity mechanism in place. In the absence of cross-repayment obligations, credit enhancement or liquidity reserves, the bond would be in default if any of the joint issuers fail on their obligations. In Fitch's view a joint bond issue that does not provide mutual support or solidarity mechanisms among the different obligors, or collateral backing is dependent on the weakest participant for repayment. Consequently, Fitch assesses the issue based on the credit quality of the weakest participant. Fitch applied its public sector entity criteria with a top-down approach to assess each obligor (French public health establishments; PHE) as they are classified as credit-linked entities. The PHEs involved are Assistance Publique Hopitaux of Marseille, Hospices Civils of Lyon (AA/Stable/F1+), Regional and University Hospital (CHU) of Toulouse, CHU of Montpellier, CHU of Dijon, CHU of Bordeaux, CHU of Clermont-Ferrand, Regional Hospital Centre of Metz-Thionville, CHU of Nancy, CHU of Nice, CHU of Nimes, CHU of Poitiers, CHU of Rouen, CHU of Grenoble, CHU of Saint Etienne and CHU of Besancon. As a PHE, Fitch expects obligors to benefit from very strong state support in case of need. The French government does not explicitly guarantee obligors' debt, but Fitch assumes that the state would be willing to provide timely support in case of need. By virtue of their status, the assets and liabilities of the obligors cannot be liquidated or transferred to entities other than the French state. Moreover, as a PHE, the debt of obligors is included in social security debt, which is accounted as general government debt under the Maastricht Treaty. Due to PHEs' integration in the general government accounts and the state's role in financing (through decisions on tariff-setting and general grants), Fitch views the obligors' links with the state as strong. At end-2015, obligors' revenue from their sponsor remained stable at an average of 77% of total operating revenue. Moreover, the state monitors regional health policies and exercises budgetary and financial control over the hospitals through their respective regional health agencies (ARS; state agency). Due to their status as regional hospitals, obligors perform an essential public service through their provision of health care service in their regional territory. Fitch believes this means that if they were in financial distress, they would benefit from stronger and more immediate state support than other hospitals. Borrowings are subject to approval by the state if the PHE does not comply with certain budgetary ratios. At end-2015, 11 (out of a total of 16) obligors continued to be subject to such approval. Each obligor's liquidity is also underpinned by the tight state control through regional committees and potential extraordinary transfers from the state in case of need. Some of the obligors (CHU of Bordeaux, HCL and CHU of Montpellier) are allowed by law to issue a French commercial paper programme. In view of the safeguards, Fitch views a rating differential of three notches from the sponsor (France; AA/Stable/F1+) is appropriate as a rating floor for French PHEs. Obligor's budgetary framework for 2016 and 2017 are based on the changes planned under the national objective of healthcare expenditures (1.75% in 2016 and 2.1% in 2017). These changes will lead to reductions of both tariffs and state transfers. The financing of after-care and rehabilitation is uncertain. Although Fitch expects obligors to improve their budgetary profiles due to efficiency efforts the share of staff costs on total expenditure and the civil servant status of most staff members will constrain spending flexibility. At end-2015, with about 30,000 beds, the obligors' budget performance was fairly homogenous and stable with an average gross margin without financial aid of about 5% (2014: about 6%). The obligors' total long-term debt represented 45% of consolidated revenue at end-2015 (2014: 46%), although the share of each hospital varied from 14.5% to 77%. Given ARS financial aid, each obligor's self-financing capacity was sufficient to cover capital debt repayment. Each year, the state controls hospitals' budget performance and follows their investments through the inter-ministerial committee for performance and modernisation. RATING SENSITIVITIES A downgrade would most likely follow a downgrade of the sovereign rating due to links between the joint bond's rating to the Issuer Default Rating of the French Republic. A dilution of the PHE legal status or control from the sponsor or weakening financial support from the state could also trigger negative rating action. An upgrade would most likely result from a reinforcement of commitments from the sponsor or a sovereign upgrade. Contact: Primary Analyst Arnaud Dura Director +33 1 44 29 91 79 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Pierre Charpentier Analyst +33 1 44 29 91 45 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 International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities - Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015471 Solicitation Status here Endorsement Policy 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 WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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