April 25, 2014 / 3:40 PM / in 4 years

Fitch Revises Department of Essonne's Outlook to Negative; Affirms at 'AA'

(The following statement was released by the rating agency) PARIS, April 25 (Fitch) Fitch Ratings has revised the Department of Essonne's Outlook to Negative from Stable. It has also affirmed the department's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' and its Short-term foreign currency IDR at 'F1+'. Its EUR1bn euro medium-term programme and its EUR160m commercial paper programme have been affirmed at 'AA' and 'F1+'. KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: High: The Outlook revision reflects Fitch's expectation that the department's operating margin will weaken to 9% in 2016, from a preliminary result of 12.4% in 2013, despite the introduction of national compensation resources for departments from 2014. This is based on Fitch's assumption of further cuts in state transfers, which, combined with growing social spending, is likely to contribute to deterioration in the department's financial profile. With an average annual capital expenditure of EUR200m, Fitch estimates that the debt payback ratio could reach about 12 years or 91 % of current revenue in 2016, which would be negative for the ratings. Direct debt was EUR861.2m in 2013, representing 77% of current revenue and a debt payback ratio of 6.9 years, in line with its peers. Debt is actively managed with diversified borrowing, notably through its EUR1bn EMTN programme (bonds represented about 30% of total outstanding at end-2013). Essonne's budget shows limited flexibility, as its operating revenue is mostly based on non-modifiable taxes and state transfers, and its operating expenditure is driven by rigid items such as staff costs, mandatory transfers and state-defined social spending. Possible shrinkage in departmental current transfers would provide some, albeit limited, operating spending flexibility, allowing Essonne to concentrate on its core competencies. Medium: The institutional framework for French departments remains robust. However, departments' scope of responsibilities may change in the medium term, pending the French government's plans for a territorial reform involving a change in local authorities' responsibilities and revenue through a law to be presented. Benefiting from the size and strength of Greater Paris, Essonne's economy is diversified and dynamic. While this has provided Essonne with a favourable socioeconomic profile and one of the lowest unemployment rates in France (7.4% at end-3Q13), Fitch expects a slight deterioration of its socio-economic profile in the medium term. Despite the department's gross social expenditure per capita being below the metropolitan average, Fitch expects this to slightly increase over the medium term. Essonne's ratings also reflect the following rating drivers: Guaranteed debt totalled EUR182.2m in 2013. Although the financing plan for the construction of a new stadium in Essonne is not finalised, Fitch estimates that in a stress case (if the stadium is built) the department is likely to guarantee the loans contracted by the French Rugby Federation of about EUR250m in 2015 (246% of operating balance). Fitch will monitor this project and its financial consequences for the department. The department's self-financing capacity (SFC; current balance plus capital revenue) remained stable at 84% of capital expenditure at end-2013. Fitch expects SFC to decline to about 63% in 2016. Fitch believes Essonne has some capex flexibility in investments where it acts as project manager (57% of total investments at end-2013) allows some flexibility on timing and schedules. RATING SENSITIVITIES A downgrade could result from the department's inability to control its operating expenditure, with an operating margin sustainably below 10% and a debt payback ratio of above 10 years. KEY ASSUMPTIONS Our base case scenario relies on the following assumptions: -Tax rates will remain stable, with slight variations of the tax base -Operating expenditure will remain controlled, with a maximum of 1.8% per year increase on average over 2013-2016 -Capital expenditure will average EUR200m per year over the medium term Contact: Primary Analyst Arnaud Dura Associate Director +33 1 44 29 91 79 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst David Lopes Associate Director +33 1 44 29 91 45 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 7064 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. Applicable Criteria and Related Research: Essonne, Department of - Rating Action Report here Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Effective from 9 April 2013 – 23 April 2014 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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