Fitch Affirms Department of Essonne at 'AA-'; Outlook Stable
Essonne's EUR1bn euro medium-term programme has also been affirmed at 'AA-' and 'F1+'. Its EUR160m commercial paper programme has been affirmed at 'F1+'.
The affirmation reflects Fitch's view that despite expected weakening over the medium term, the department will be able and willing to keep financial metrics compatible with the ratings. Essonne's ratings are also underpinned by a track record of sound operating performance, controlled indebtedness, strong governance and diversified economy.
KEY RATING DRIVERS
Fitch forecasts that the operating margin will decline to around 10% of operating revenue in 2018, from 12.1% at end 2014. This is mostly due to the impact of strong cuts in state transfers (-6% on average between 2015 and 2017). This will lead to a decline in revenue not fully compensated by operating spending restraint, although operating spending is expected to grow at a slower pace (0.9% over 2015-2018 against 2.1% in 2011-2014) as cost-cutting measures are implemented.
Despite the strong management and cost-cutting measures, Essonne's budget has limited flexibility, with around 70% of operating revenue based on non-modifiable taxes and state transfers. Operating expenditure is driven by rigid items such as state-defined social spending, mandatory transfers and staff costs. However, there is some budgetary flexibility stemming from the department's direct tax leeway, although this option is currently not being contemplated.
Direct debt remained moderate at 80% of current revenue at end-2014, but is expected to increase around 93% of current revenue in 2018. We also expect the debt payback ratio to rise to about 11 years in 2017, from 7.5 years at end-2014. This is mainly due to the deterioration of the current balance, as Fitch forecasts in accordance with the issuer's commitment, a gradual scaling-down of capital expenditure to more than EUR170m per year between 2016 and 2018 (against EUR200m on average per year over 2011-2014). Although the debt payback ratio could increase to around 11 years in 2017, we consider that the department is able to maintain debt metrics compatible with its ratings through the implementation of corrective measures.
Debt guarantees were high at EUR190m (168% of operating revenue) at end-2014. However, they are mostly for low-risk and regulated social housing entities. Dependent public-sector entities are fully self-funded and well capitalised. However, if the building of a new stadium in Essonne is confirmed, Fitch will monitor the possible consequences for the department if it guarantees the loans contracted by the Rugby Federation.
Benefiting from the size and strength of Greater Paris, Essonne's economy is diversified and dynamic. This has provided the department with a favourable socioeconomic profile and one of the lowest unemployment rates in France (7.7% at end-2014). Furthermore, the department's economy is supported by a strong and dynamic R&D and higher education sector with a large number of the best French higher education institutions and public or private research centres.
A downgrade could result from the department's inability to control its operating expenditure, with an operating margin sustainably below 7% or a direct debt to current balance ratio over 13 years.
A direct debt to current balance ratio under seven years and restoration of an operating margin consistently over 10 % could lead to an upgrade.