Fitch Revises Outlook on Eurometropole of Strasbourg to Stable; Affirms at 'AA'
The revision of the Outlook reflects our expectations that Eurometropole will maintain budgetary and debt ratios compatible with the ratings in the medium term.
KEY RATING DRIVERS
The rating action reflects the following key rating drivers and their respective weights:
We expect the operating margin to decline to 19.5% at end-2016, from a sound 22.3% at end-2015, and then average 20.5% in 2017-2019. The expected decline in the operating margin in 2016 is due to sharp cuts in state transfers (EUR11m) and high non-recurring operating spending. After 2016, the dynamism of tax revenue and the possible use of the tax leeway should allow Eurometropole to offset cuts in state transfers in 2017. Meanwhile, operating spending is likely to grow very slowly as Eurometropole is implementing cost-cutting measures, including in staffing.
Fitch expects capital expenditure to decrease to EUR150m a year on average in 2016-2019, down from EUR190m in 2015, as Eurometropole is scaling-down its investment programme. Accordingly, we expect the self-financing capacity before debt repayment to exceed 100% on average until 2019, leading to a stabilisation and possibly a slight reduction in debt.
According to our base case scenario, Eurometropole will be able to keep its debt below 120% of current revenue in the medium term (2016: 116.5%). We estimate that the debt payback ratio will exceed seven years at end-2016, from six years at end-2015, but subsequently remain below seven years.
Eurometropole's level of debt guarantees is high at EUR1.6bn at end-2015 (356% of operating revenue), up from EUR1.4bn at end-2014 (325%). However, about 90% is for the benefit of social housing entities, which Fitch views as a highly regulated and consequently low-risk sector.
Eurometropole benefits from sound governance as its full integration with the City of Strasbourg (AA/Stable/F1+) facilitates economies of scale and policy coordination. The political framework is stable with a cross-party consensus on key issues, especially financial strategy. Eurometropole's management has shown its ability to control spending, especially staff costs, in 2015 and through the 2016 budget. We believe it will be able to achieve its spending objectives in the coming years.
Eurometropole's ratings also reflect the following key rating driver:
Eurometropole's economy is well diversified, characterised by a strong services sector, especially financial and business services, and a still significant industrial base. It is also supported by a large public sector, including prominent European Institutions. Eurometropole is well served by international communication networks and should benefit from the new TGV line reducing travel from Paris to Strasbourg to only 1 hour 45 minutes.
An inability to control operating or capital expenditure, leading to a debt payback ratio weakening towards 10 years could result in a downgrade. A downgrade of the sovereign (AA/Stable/F1+) would also be reflected in Eurometropole's ratings.
An upgrade could be triggered by a sustained improvement of the debt payback ratio to below four years, provided the sovereign's rating is also upgraded.
Our base case scenario does not factor the transfers of competencies from the Department of Bas-Rhin, especially road maintenance.
Contrary to our last reviews, we consider operating transfers made by Eurometropole to its member municipalities (EUR83.2m in 2015) as operating expenses rather than lower transfers received in order to be consistent with other Fitch-rated issuers. This adjustment improves Eurometropole's debt to revenue ratios and deteriorates its operating and current margins. However, it is neutral for Eurometropole's current balance and, hence, debt repayment capacity.