(The following statement was released by the rating agency)
Nov 20 -
Summary analysis -- Gironde (Department of) ----------------------- 20-Nov-2012
CREDIT RATING: AA/Stable/A-1+ Country: France
Primary SIC: General
Credit Rating History:
Local currency Foreign currency
12-Oct-2012 AA/A-1+ AA/A-1+
The ratings on the Department of Gironde reflect our view of the “predictable and well-balanced” institutional framework for French departments, as our criteria define the term. They also reflect Gironde’s “positive” liquidity position, “positive” financial management, sound budgetary performance, and limited debt. The ratings are constrained by the department’s restricted budgetary flexibility.
We view Gironde’s financial management as “positive” for the department’s credit standing. This reflects our view that the department has a clear financial strategy, tight monitoring of operating expenditure including social charges, and sophisticated reporting tools. In addition, Gironde has limited risk associated with its contingent liabilities, in our view.
Gironde reported sound 2011 budgetary margins, with an 11.6% operating margin, up from 10% in 2010, mostly reflecting a very high rise in property transfer fees, which reached 17% of operating revenue in 2011 (excluding revenues from the national property transfer fees equalization scheme). Property transfer fees have been very volatile in recent years, largely explaining swings in operating margins, which declined to a low of 7.6% in 2009. However, they have grown significantly since 2009, explaining the rebound in the operating margin. Gironde reported high operating expenditure growth of 4.8% per year from 2009 to 2011 despite its tight grip over personnel and general expenditure, because of a significant increase in social charges over the period. However, excluding social benefits paid on behalf of the state and payments to the national property transfer fees equalization scheme from 2011, Gironde limited its operating expenditure growth to 2.6% per year from 2009 to 2011. The department had moderate deficits after investments of 5.5% of total revenue on average from 2009 to 2011, despite high capital expenditure (capex), especially in 2009 when capex was EUR267 million. As a consequence, Gironde’s direct debt grew slightly to a still low 36% of operating revenue in 2011, from 33% in 2008.
In our base-case scenario, we include a reduction in Gironde’s operating margin to about 8% in 2014, which corresponds with the department’s minimum threshold. We project that operating revenue will grow more slowly than in 2009-2011, at 1% per year, taking into account that state transfers will be frozen until 2013 and fall 1.5% in 2014, and our expectation of a 10% fall in revenues from property transfer fees in 2013. Our base-case scenario incorporates more controlled growth of operating expenditure at 2.4% per year in 2012-2014 despite rising social charges. This is because we expect Gironde to maintain a tighter grip over expenditure, including a firm commitment to curb expenditure further if the department does not meet its financial objectives. We project still-high capex averaging EUR217 million annually in 2012-2014, including significant investments in junior high schools and subsidies paid for the Tours-Bordeaux (SEA) high-speed train track. We forecast that the department will post a limited 4% average deficit after investments in 2012-2014.
We view Gironde’s tax-supported debt (44% of operating revenue at the end of 2011) as low compared with that of its French and international peers, while interest payments are also low, at 1% of operating revenue. However, in our base-case scenario, we expect that the department’s tax-supported debt will increase to 56% of operating revenue in 2014, reflecting capex funding and our analytical approach of consolidating a public-private partnership (PPP) contract into Gironde’s tax-supported debt. The department signed the contract in 2011 to construct various social aid premises to be completed from the end of 2013 onwards. Accordingly, from 2013, we will consolidate EUR40 million related to PPP commitments into Gironde’s tax-supported debt.
We consider the department to have restricted budgetary flexibility. Operating expenditure accounts for more than 84% of total expenditure and is mostly rigid, including staff costs at 18% of operating expenditure, social benefits at 29%, homes and social lodging at 19%, a contribution to fire brigades at 7%, and interest at 1%. Modifiable tax revenues account for 20% of operating revenue, and in our base-case scenario, we expect Gironde to use its tax leeway moderately in 2012-2014 at about 2% per year on average, but with limited financial impact. We believe Gironde’s financial flexibility mostly depends on its ability to reduce its expenditure, most notably capex.
Gironde is located in south-western France in the Region of Aquitaine. It is France’s largest mainland department and had over 1.44 million residents in 2010, mostly located in the urban area of Bordeaux, with comparatively high demographic growth reflecting its attractiveness to newcomers. Its socioeconomic indicators are in line with national standards and high in an international context.
We view Gironde’s liquidity position as “positive” for the credit rating. We project that the department will cover well over 120% of its EUR56.5 million debt service over the coming 12 months with its available facilities. These include EUR90 million available through a variety of liquidity and revolving facilities. . They also include a fully available EUR83 million bank loan with a revolving feature contracted with Caisse des Depots et Consignations (AA+/Negative/A-1+) until 2016 to fund subsidies to the SEA high-speed train track.
The stable outlook reflects our base-case expectation that Gironde will maintain its operating margins and limit its deficit after investments and debt accumulation over the next two years.
We could consider a positive rating action if Gironde were to sustainably achieve better budgetary performances, supporting a more positive assessment of its financial management.
We could consider a negative rating action if the department were to record structural growth in its deficit after capital accounts leading to higher debt accumulation (more than 65% of operating revenues), which could lead to a more negative assessment of its financial management. We could lower the rating if we were negatively to reassess the institutional framework for French departments.
We view both our upside and downside scenarios as unlikely at this stage.
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