Fitch Affirms Department of Val d'Oise at 'AA-'; Outlook Negative
The department's EUR1bn euro medium-term programme and EUR100m Titres Negociables a Court Terme (TNCT) programme have been affirmed at 'AA-' and 'F1+'.
The ratings reflect Val d'Oise's solid economy and strong governance, as well as its low operating performance for a 'AA-' rating and high debt levels compared with peers. The Negative Outlook reflects the department's weaker position relative to 'AA-' peers, its exposure to weaker performance, given its volatile tax base, rigid expenditure and possibly adverse central government decisions, despite control of spending.
KEY RATING DRIVERS
According to our scenario, Val d'Oise's current margin will average 8.6% in 2016-2019, from 6.7% in 2015. Operating revenue (+2% per year) is expected to be driven by tax proceeds, mostly due to the 2016 hike on property tax (+3.9 bp), while we expect sluggish growth of real estate transfer duties, after a bounce in 2015. Tax growth should compensate for state transfer cuts, planned until 2017.
We expect operating spending to grow 1.8% a year until 2019. This assumption incorporates rigid staff costs and dynamic social spending. The latter is driven by the region's high unemployment rate, although we expect social spending to soften somewhat (3.3% a year until 2019, from 5.5% on average in 2011-2015), due to steady economic recovery. We forecast expenditure growth will be mitigated by budget savings, tightly controlled staff costs and a scaling down of non-mandatory spending.
Notwithstanding the measures taken by the department to stabilise operating performance and debt metrics, future performance will also depend on external factors. Like other French departments, Val d'Oise is sensitive to economic cycles, as its compulsory spending (especially social benefits) is partly correlated to unemployment figures, while its revenue mix is significantly exposed to the local real estate cycle (real estate duties made up 17% of 2015 operating revenue). The latter has evolved erratically and is a source of budget volatility.
We expect debt will slightly reduce in 2016, but remain high compared with peers over the medium term. Our base case scenario forecasts debt to average 91% of current revenue until 2019 (2015: 102%). This will result from a forecast improvement in self-financing capacity (after debt repayment) to 44% until 2019 from an average 29% in 2011-2015, a stronger current margin and our assumption of stable capital expenditure of an average EUR130m a year.
The debt-to-current balance ratio is likely to improve to 8.8 years in 2016 (2015: 15.2 years) before weakening to close to 11-12 years by 2019. Debt service coverage is weak compared with peers, as the operating balance is usually fully dedicated to debt servicing. It improved to 105% of operating balance in 2015 from 124% in 2014. However, we do not foresee significant improvement over the medium term, with the coverage ratio likely to remain above 90%.
Val d'Oise's ability to implement its saving plan is underpinned by the department's administration. Management is prudent and follows a clear budgetary strategy. Cash flows are predictable, and prudently managed. Short-term funding is adequate and relies on the regular use of a EUR100m billets de TNCT programme, fully backed by committed credit and revolving lines.
Val d'Oise benefits from its location within the Ile-de-France Region (AA/Stable/F1+), one of Europe's wealthiest regions. Its economic prospects are supported by dynamic industries and large land reserves in the greater Paris urban area.
Val d'Oise's high level of debt guarantees (EUR549m at end-2015) are mostly related to social housing institutions (83% of total), which are strictly monitored and regulated by the state. Fitch views Val d'Oise's main public sector entities (social housing institutions and fire services) as low risk.
A weakening of the current margin to below 7% on a sustained basis or a debt-to-current balance of consistently above 15 years could lead to a downgrade.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.