Fitch Affirms Centre-Val-de-Loire 'AA'; Outlook Stable
Fitch has also affirmed the region's EUR160m Titres Negociables a Court Terme (TNCT) programme at 'F1+'.
The ratings reflect the Region of Centre-Val-de-Loire's track record of strong budgetary performance, low debt, prudent management and a favourable socio-economic profile. The ratings also reflect the risk of weaker budgetary performance over the medium term, due to cuts in state transfers.
KEY RATING DRIVERS
Strong Budgetary Performance
The ratings are underpinned by the region's track record of strong and stable budgetary performance. However, according to our base case scenario, the operating margin will decline over the medium term, to 17.4% on average until 2019 from 26% in 2011-2015. This is mostly due to falling state transfers not being fully compensated by a growing tax base, while spending will continue to grow.
Our base case scenario factors in transfers of competencies from departments (school and intercity bus lines) from 2017, as an effect of the NOTRe law (law on the New Organisation of the Republic) enacted on 7 August 2015, which will inflate both operating revenue and spending over the medium term.
Centre Val-de-Loire's flexibility on operating revenue is limited to less than 10% of total revenue. The regional administration aims to mitigate the effect of declining state transfers through greater spending restraint and a trade-off between different budget spending items. Centre-Val-de-Loire's ability to control operating expenditure is supported by the region's flexibility on discretionary spending, notwithstanding a political commitment to maintain spending in some policy areas (such as transport or culture) in the medium term. The control over spending is expected to - at least partially - offset the growth of spending in rigid items (train services, professional training).
We expect Centre-Val-de-Loire's capital expenditure to remain significant until 2019, at EUR320m a year on average (including passed-through EU funds), considering the region's commitment to maintain constant capital outlay as outlined in the 2015-2021 mandate. This, together with the expected decline in operating performance, should lead to a weaker self-financing capacity (SFC) averaging 58% (after debt repayment) over the medium term, down from a strong 83% on average in 2011-2015.
Debt to Grow
Centre-Val-de-Loire's direct debt is low compared with other French regions, at 81% of current revenue in 2015 or 3.7 years of current balance. Given the expected decline in SFC, we forecast direct debt to grow over the medium term towards 90% of current revenue and 6.1 years. Including finance leases, Centre-Val-de-Loire's direct debt has grown with the consolidation in 2Q16 of another contract (EUR161m), and is expected to reach over 110% of current revenue or 8.1 years of current balance in 2019, from 89% and four years in 2015. Debt service coverage by operating balance should remain sound at 47% on average until 2019, up from 33% in 2015.
Liquidity is underpinned by predictable cash flows and the regular use of the region's EUR160m TNCT programme. Additionally, the programme has a back-up facility consisting of committed bank lines for a total of EUR160m, providing a sound financial safeguard.
Despite its small size compared with other French regions, Centre-Val-de-Loire's socio-economic profile is balanced, due to the region's resilient local industry (cosmetics and pharmaceuticals) and robust agricultural and tourism sectors. Socio-economic indicators are in line with the national average (GDP per capita stands at 97% of national average outside Ile-de-France). The region's poverty indicators and unemployment rate are slightly better than the national average with the latter at 9.6% at end-1Q16, below France's 9.9%.
A positive rating action may result from an upgrade of the sovereign rating (AA/Stable/F1+), provided that the region's operating margin remains in line with the last five-year average, debt payback is below five years and direct debt-to-current revenue is below 70%.
Sharper-than-expected deterioration in Centre-Val de Loire's budgetary performance, leading to a worsening of debt ratios (e. g., debt payback of about eight years on a sustained basis), could lead to a downgrade.