Fitch Affirms Department of Puy-de-Dome's at 'AA'; Negative Outlook
OREANDA-NEWS. Fitch Ratings has affirmed Puy-de-Dome's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with Negative Outlook, and the Short-term foreign currency IDR at 'F1+'.
The department's EUR500m euro medium-term programme and its EUR100m commercial paper programme have been affirmed at 'AA' and 'F1+'.
The affirmation reflects Puy-de-Dome's track record of sound operating performance, moderate debt, strong governance and balanced socio-economic profile.
The Negative Outlook reflects Fitch's expectation that the department's budgetary performance and debt metrics will weaken in the medium term. This is mainly due to cuts in state transfers that will not be fully compensated by operating spending restraint, and will thus result in a deterioration of the department's budgetary profile and debt payback. As with other French departments, Puy-de-Dome is exposed to economic cycles and faces budgetary pressures from faster growth in expenditure over revenue on a sustained basis.
KEY RATING DRIVERS
According to our baseline scenario, we expect the operating margin to weaken slightly over the medium term, to 10.5% by 2019, from an average of 13.2% in 2011-2015. This is due to the impact of state transfers cuts, which will lead to flat revenue. However, this deterioration is less severe than what we had expected.
Firstly, estimated 2015 results show a stabilisation in the operating margin (12.6%, from 12.3% in 2014 and above our forecast of 10%) as tax revenue, and especially property transfer duties, have grown more steadily over 2Q15. Secondly, Puy-de-Dome's executive assembly and administration have outlined an additional package of savings and control measures for 2016 and 2017, including a cap on discretionary social spending items, workforce reduction, control of general spending, freeze on grants, and further cuts in discretionary expenditure. This has been partially factored into our projections, as a significant part of the budget tightening plan has already been adopted in the 2016 budget (voted in December 2015).
Therefore, we expect operating spending to slow to 1.1% a year until 2019 (at constant scope of competencies), from 2.4% in 2010-2015. The budget tightening plan would mitigate the impact of rigid spending items, especially social spending which will continue to follow an upward trend in the medium term, other things being equal. The department's cost-cutting plan is underpinned by strong governance based on a skilled administration, a stable local political environment, and a track record of prudent financial management. The administration aims to keep the department's operating margin close to 10% and the debt payback ratio below nine years over the medium term.
Puy-de-Dome's revenue mix offers limited flexibility as 75% of operating revenue is based on non-modifiable taxes and state transfers. However, some budgetary flexibility stems from Puy-de-Dome's direct tax leeway (property tax), although the administration is not contemplating this option. Some tax items, especially property transfer duties (10% of operating revenue), tend to evolve erratically and are less than predictable. Our base case scenario could be revised downward if the local real estate market experiences a downturn.
Over the medium term, Puy-de-Dome aims to scale back capital expenditure to slightly below EUR100m, from an average EUR122m in 2010-2015. According to Fitch's base case scenario, this would not be sufficient to fully offset the expected decline in its current balance. Therefore the department's self-financing rate of capital expenditure (current balance and capital revenue, net of debt repayment, over capital expenditure) is likely to weaken to 47% in 2016-2019 from 59% in 2010-2015.
Direct debt reached EUR400.2m or 63% of current revenue at end-2015 (including short-term debt), a moderate level compared with peers. The debt payback ratio remains comfortable at 5.5 years. With the expected lower current balance, the ratio may deteriorate to around eight years in the medium term. The debt structure is sound and does not include high-risk products.
Liquidity is underpinned by strong predictable cash flows and by easy access to short-term funding. The latter is based on regular issuance of Billets de Tresorerie (BT) under a EUR100m programme, backed by adequate revolving and committed bank credit lines. Liquidity forecasts are detailed and updated regularly.
Despite a high level of contingent liabilities, with growing debt guarantees over 2015, Fitch considers contingent risks as low due to borrowers' solid credit profiles (mostly social housing institutions) and their sound debt structure. A sophisticated monitoring framework and strict eligibility guidelines implemented by the administration should limit the growth of guaranteed debt over the medium term.
Puy-de-Dome's socio-economic indicators are in line with national average, albeit with a structurally lower unemployment rate (9% in 3Q15, against 10.2% for France). Puy-de-Dome benefits from dynamic industries and hosts most research facilities and decisional centres of former region Auvergne (merged with region Rhone-Alpes since 1 January 2016).
A deterioration of operating performance leading to an operating margin weakening towards 10% or a debt payback ratio consistently above eight years could result in a negative rating action.