(The following statement was released by the rating agency)
Nov 27 -
Summary analysis -- Communaute d‘Agglomeration Tours Plus --------- 27-Nov-2012
CREDIT RATING: A+/Positive/-- Country: France
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
12-Oct-2005 A+/-- A+/--
The rating on Tours Plus reflects our view of the “predictable and well-balanced” institutional framework for French intercities, the intercity’s “very positive” liquidity position, its good socioeconomic profile by international standards, and potentially high budgetary flexibility. The rating is constrained by Tours Plus’ very high tax-supported debt and our expectation of growing deficits after capital accounts.
We view the institutional framework for French intercities as “predictable and well-balanced,” mainly thanks to its good revenue and expenditure balance. In this context, Tours Plus posted a very strong operating performance over 2009-2011, with an operating balance above 37% of operating revenues on average.
Nevertheless, under our base-case scenario for 2012-2014, we expect a gradual decline of Tours Plus’ operating balance to a still high 29% of operating revenues in 2014. In our view, Tours Plus’ moderate hold on operating expenditure--with a forecast annual increase of about 3%--will not offset sluggish operating revenues, which we anticipate will only rise 1% annually until 2014. This is partly due to decreasing state transfers, which represented 25% of operating revenues in 2011, and less favorable economic conditions. In addition, Tours Plus’ operating performance does not reflect its eventual operating contribution to transportation authority (SITCAT) or the impact of France’s new equalization fund for cities and intercities, which both remain uncertain.
While we expect Tours Plus to maintain a heavy capital expenditure program (EUR50 million-EUR55 million annually), the decline in operating balance will translate into growing deficits after capital accounts exceeding 6% of total revenues on average in 2013 and 2014, compared with a moderate 3% in 2009-2012.
We consider Tours Plus’ financial management to be “neutral” for the rating. We view positively the intercity’s willingness to monitor expenditure and its prudent debt and liquidity management. However, we consider that Tours Plus and SITCAT’s long-term financial strategies and budgetary and debt targets could be better defined.
Owing to SITCAT’s first tramline project, our rating already incorporates our expectation of a very quick increase in tax-supported debt. Tours Plus’ tax-supported debt, which includes SITCAT’s direct debt, will likely reach a peak of 255% of consolidated operating revenues by year-end 2012, in line with our previous base-case expectations. We expect tax-supported debt to decrease rapidly in 2013 and 2014, mainly due to SITCAT’s reimbursement of its short-term loans. Going forward, it will likely stabilize at a very high level of 220% of consolidated revenues.
We consider that Tours Plus has high potential budgetary flexibility. In our view, it has great leeway on both tax revenues (58% of operating revenues in 2011) and capital expenditure (29% of total expenditure in 2011). However, Tours Plus is strongly committed to not increasing taxes. Consequently, we believe that most of Tours Plus’ budgetary flexibility depends on its ability to postpone or reduce capital expenditure.
We view Tours Plus’ liquidity position as “very positive” under our criteria. We consider that it has a very positive debt coverage ratio and “satisfactory” access to external liquidity. In our view, the intercity has predictable and regular cash flows, especially state transfers and tax proceeds.
We expect Tours Plus’ debt service coverage to remain sound, with average adjusted cash and liquid assets over the next 12 months accounting for more than 100% of its next 12 months’ debt service. Tours Plus has not implemented a zero-based cash management policy, which is rare among French local and regional governments we currently rate. We view this positively as, thanks to its comfortable cash position, Tours Plus is not exposed to the renewal of any liquidity line.
We believe Tours Plus has satisfactory access to external liquidity in the context of France’s strong banking sector. Under our Banking Industry Country Risk Assessment (BICRA) methodology, Standard & Poor’s ranks France in BICRA group ‘2’. BICRA scores range from ‘1’ to ‘10’, with the lowest-risk banking systems in group ‘1’ and the highest-risk in group ‘10’.
The positive outlook reflects our view of a one-in-three likelihood that Tours Plus will better define its long-term financial strategy and further improve its expenditure management. In this upside scenario, clear budgetary and debt targets and detailed financial planning both at Tours Plus and SITCAT would likely lead us to view the intercity’s financial management more positively. Moreover, a stronger rein on operating expenditures and the limited impact of an eventual operating subsidy to SITCAT would allow Tours Plus to maintain moderate deficits after capital accounts below 3% of total revenues. If both these elements materialize, we would upgrade the rating.
In our base-case scenario underpinning our ‘A+’ rating on Tours Plus, we expect that the gradual decline of the operating balance will translate into growing deficits after capital accounts above 6% of total revenues in 2013 and 2014. In addition, this scenario incorporates uncertainties about the potentially negative impact of an eventual operating contribution to SITCAT or of France’s new equalization fund for cities and intercities.
If we consider that our upside scenario is less likely than what we currently envisage, we would revise the outlook on Tours Plus to stable.
We understand that from 2014, Tours Plus could cover three new cities, adding another 9,000 inhabitants to its remit. We don’t incorporate this into our scenarios at this point because we currently have limited visibility on the financial impact, although we would expect it to be moderate.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Institutional Framework Assessments For International Local And Regional Governments, Dec. 19, 2011
-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009