OREANDA-NEWS. Fitch Ratings has affirmed the Department of La Manche's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA-' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable.

The affirmation reflects La Manche's continuing sound budgetary performance and moderate debt. The Stable Outlook is reflects our expectations that the department will both contain the deterioration of its current margin and limit debt growth in line with its peers, due to its financial leeway.

KEY RATING DRIVERS
The ratings reflect La Manche's sound operating performance, strong economic profile and sound management, as well as its moderate, but growing, debt and the risk of a slightly weaker budgetary performance over the medium term, due to cuts in state transfers.

According to Fitch's base case scenario, the current margin is expected to decline to 9% of operating revenue in 2018, comparable with its peers, from an expected 12% at end-2015. The deterioration in performance is mainly due to the sharp cuts to state transfers, while we expect operating spending to continue to grow, though at a slower pace (1% over 2015-2018 compared with 2.3% over 2010-2014) as cost cutting measures continue to be implemented.

Although La Manche has committed to leaving tax rates unchanged in the medium term, Fitch considers the department's tax flexibility a positive rating factor. However, some tax items, especially property transfer duties, have evolved erratically and are unpredictable. Due to its responsibility for social welfare, a large part of spending is correlated with the economic cycle, for which department has no leeway.

Despite an erosion of the current margin, we expect the department's self-financing rate of investment to remain sound at 93% in 2018, based on our assumption of a slight decrease in investment to an annual average of EUR68m over 2016-2018 compared with an estimated EUR80m at end-2015. Fitch estimates La Manche has capex flexibility for 20% of its investments.

Fitch expects direct debt to remain moderate at end-2015, at EUR327.9m with a debt payback ratio of 5.6 years compared with EUR335.3m and 5.6 years at end-2014. Despite the aim to keep the direct risk payback ratio (including PPPs) below seven years, Fitch estimates that it could weaken to eight years in 2018 . Nevertheless, it should remain compatible with the current ratings and average debt maturity of La Manche.

Although the amount of guaranteed debt is high in absolute terms (EUR268.5m at end-2014), Fitch considers risk related to guaranteed debt as low. This is because the guarantees are mostly granted to low-risk regulated social housing entities.

The structure of the local economy is less sensitive to national economic fluctuations than other regions. In 2Q15, the unemployment rate (8.3%) remained lower than the national average (10%). Given the department's social welfare responsibility low employment should result in social spending being below the department's historical average. Although the population's wealth is high in the international context it remains below the national average while the wealth of the elderly population is slightly above the national average.

RATING SENSITIVITIES
A downgrade could result from La Manche's inability to control its operating expenditure and to adjust its capital expenditure to its self-financing capacity, resulting, for instance, in a debt payback ratio above 10 years.

Although Fitch considers it unlikely given the cuts in state transfers, an improvement in the current margin for several consecutive years combined with controlled capital expenditure, leading, for instance, to a debt payback ratio consistently lower than five years, could lead to an upgrade.