Fitch Affirms Department of Essonne at 'AA-'; Outlook Stable
The affirmation reflects Fitch's view that that Essonne will be able to maintain financial and debt metrics compatible with the ratings in the medium term, despite facing challenges.
KEY RATING DRIVERS
According to Fitch's base case scenario, Essonne's operating margin should reach 11% in 2016 up from 9.7% in 2015, and then average 10% in 2017-2019. We expect operating revenue to grow 4.8% in 2016 as a result of the 29% increase of the property tax rate set in early 2016. The evolution of the operating margin and operating revenue will be dependent on the property transfer duties, which may be volatile. At this stage, our projections include an assumption of flat proceeds from property transfer duties at their 2015 level (EUR193.5m, or 17.2% of operating revenue) and we expect operating revenue to slightly decrease after 2016, mainly due to the cuts in state transfers in 2017.
Fitch expects the department's operating expenses to be under pressure in the coming years due to growing social spending, including social benefits, disability and old age dependence. However, this will be somewhat mitigated by the implementation of cost-cutting measures (EUR35m in 2016), including job cuts. The department also has to pay accumulated unpaid bills, estimated at EUR108m at-end 2015. Essonne aims to speed up this by making most payments before 2019 instead of over a six-year settlement period as was initially announced. This acceleration will affect Essonne's operating performance in the coming years, but also allow the department more flexibility in the longer term.
Capital expenditure declined to EUR165m in 2015 from EUR204m as the department scaled down its investment programme. Fitch expects it will be around EUR160m in 2016, and then average EUR180m a year in 2017-2019. We forecast the self-financing capacity (before debt repayment) to be sound at around 90% in 2016, before declining towards 70% in the coming years, leading to an increase in debt.
According to our base scenario, Essonne's direct debt may reach EUR1.1bn at end-2019, 95% of current revenue, from EUR943m at end-2015 (83.4%). However, we note that the department aims to keep direct debt outstanding below EUR1bn. We expect the debt payback ratio to slightly deteriorate to 11 years in 2019, from 9.9 years in 2016, but this would remain compatible with the ratings.
Essonne's debt guarantees totalled EUR180.7m at end-2015, representing a relatively moderate 16% of operating revenue. Almost half the guarantees (46.8% at end-2015) were granted to low-risk social housing institutions. However, the possible building of a new stadium in Essonne would significantly increase and modify the structure of the department's guaranteed debt. Fitch will monitor the progress of the stadium project.
Essonne's economy is diversified and dynamic, benefiting from the robustness of Greater Paris. The department's unemployment has increased in recent years but remains relatively low at 7.8% in 1Q16, compared with 9.9% for Metropolitan France. The department's economy is supported by a strong and dynamic research and development and higher education sector, concentrating a large number of the country's top-ranking higher education institutions as well as public and private research centres.
An operating margin weakening to 7% (2015: 9.7%) or the direct debt to current balance ratio deteriorating towards 13 years (2015: 9.9 years) could lead to negative rating action.
A direct debt to current balance ratio approaching six years and restoration of an operating margin consistently over 12% could lead to an upgrade.