Fitch Affirms French Region of Bretagne at 'AA'; Outlook Negative
Its EUR500m senior unsecured bonds have been affirmed at 'AA'/'F1+'. Fitch has further assigned a final short-term rating of 'F1+' to the region's EUR240m commercial paper (billets de tresorerie; BT) programme.
KEY RATING DRIVERS
The Negative Outlook reflects Fitch's view that the region's debt metrics may not be compatible with the ratings in 2018 when direct debt is forecast to reach 160% of current revenue, up from 67.5% in 2014. Fitch considers this surge in debt a result of the high level of capital expenditure scheduled over the medium term, combined with an expected weakening of the region's self-financing capacity. The ratings also take into account the region's continued sound operating performance expected for 2015 and its favourable socio-economic profile.
For 2015 investment will be lower than our previous forecast by EUR30m due to a delay in the execution of certain investments. This smaller capital expenditure, combined with a stable and sound operating margin, will result in a slight improvement of Bretagne's capital expenditure self-financing to 63.2% at end-2015 compared with the 58.8% initially projected.
Over 2016 and 2017, capital expenditure will remain in line with our projections at a high level of about EUR500m per year. This, together with an expected deterioration in Bretagne's self-financing capacity, will cause debt to rise to 142% of current revenue by 2017. However, from 2018 onwards, the end of major projects should allow the region to reduce investments to prior-2014 levels (about EUR400m).
Baring new political decisions, Fitch expects Bretagne's operating margin to weaken to 18.8% in 2018 from an expected 22.2% at end-2015. This will be due to a combination of declining revenue (with expected cuts in state transfers) and rigid operating expenditure, despite the implementation of spending control measures. Financial charges will rise in accordance with growing debt, and consequently Fitch expects the current margin to weaken to 16.8% in 2018 from an expected 21.4% at end-2015.
The next elections will take place in December 2015. Through the vote of the new budget in March 2016, Fitch will assess the ability of the new political team to implement structural measures and manage investments, as an indicator of the region's budgetary performance and debt metrics over the medium term.
The region's liquidity is underpinned by predictable cash flows and diverse credit lines. Since July 2015, Bretagne's liquidity management policy has broadened with the issue of French commercial paper (EUR240m). The region has sufficient bank loans and an untapped revolving credit line.
Bretagne's diversified economy relies on an important agricultural and food-processing sector, and on a strong industrial base. Its unemployment rate (8.8 % at end-1Q15) is below the national average (10%), due to a skilled workforce. We expect the regional economy to recover in line with the French economy.
An inability to adjust expenditure to match revenues, leading to an increase in debt-to-revenue to consistently above 120%, could lead to negative rating action.