OREANDA-NEWS. Fitch Ratings has affirmed the French department of Essonne's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA-' and Short-term foreign currency IDR at 'F1+'. The Outlook is 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 that despite some weakening of budgetary performance since 2011, the department will be able and willing to keep financial and debt metrics compatible with the ratings in the medium term.

KEY RATING DRIVERS
The ratings reflect the department's sound, albeit weakening, financial and debt metrics, and a diversified economy, which benefits from Greater Paris's robust economic base.

According to Fitch's base case, Essonne's operating margin should improve to 11.4% in 2016 from an estimated 9.9% in 2015, and then stabilise at close to 10% in 2017 and 2018. The department's operating performance will be affected by one-off items in the coming years, including cuts in state transfers, higher operating expenditure pressure, cost-cutting measures, and increasing property tax proceeds.

Fitch expects operating revenue to grow 1% on average in 2015-2018, driven by the department's recent decision to raise the property tax rate by 29% with effect in January 2016. The tax rate increase should generate a EUR71m rise in operating revenue in 2016. Although the rate is now only in line with the national average, Fitch believes that the department is unlikely to use its tax leeway in the medium term.

The department will face sharp cuts in state transfers in 2016 and 2017 (EUR24m a year), which will mitigate the positive impact of the property tax hike. In addition, property transfer duties (17% of estimated operating revenue in 2015) have evolved erratically in recent years and, as a result, remain a source of budget volatility.

Fitch estimates that operating expenditure will be under pressure in the coming years due to the payment of accumulated bills, the restoration of fully budgeted expenditure and growing social spending. Accumulated unpaid bills were estimated at EUR108m at end-2015, which the department aims to pay off over the next six years with a minimum budgeted EUR15m each year and extra revenues. In addition, to avoid further accumulation of bills, operating expenditure has been budgeted in full in 2016 and consequently represents an increase on the previous year. Finally, as with other French departments, Essonne's spending for social benefits, disability and old age dependence is likely to continue to grow in the coming years as the terms of a possible financing of social benefits (RSA) by the central government are still unknown.

To mitigate operating expenditure pressure, the department is implementing a EUR35m package of operational savings in 2016, with likely additional cost-cutting measures in the coming years, notably jobs cuts.

Capital expenditure declined to EUR165m in 2015 from EUR204m in 2014 as the department scaled down its investment programme. Fitch expects capital expenditure to average EUR170m per year in 2016-2018. We forecast the self-financing capacity (before debt repayment) to remain fairly stable around 85% in 2016, before falling to 70% in 2017 and 2018, leading direct debt to rise to around EUR1bn by 2018.

According to our base case scenario, the debt payback ratio will decline to 7.7 years in 2016 from an estimated 9.7 years in 2015, mainly due to the property tax hike. Fitch estimates that this ratio is likely to increase again to around 10 years in 2018. We also expect the department's direct debt service coverage to improve to an adequate 78% of operating balance in 2016 from an estimated 91.6% in 2015, before deteriorating again to close to100% in 2018.

Fitch estimates debt guarantees to have totalled EUR181m at end-2015 (16% of estimated operating revenue). They mostly relate to social housing entities, a sector that Fitch views as being highly regulated and hence, low-risk. However, the possible building of a new stadium in Essonne will significantly increase and modify the profile of the department's guaranteed debt. Fitch will monitor the progress of the stadium project.

Essonne's economy is diversified and dynamic, benefiting from the economic robustness of Greater Paris, The department's unemployment is low, at 7.9% in 3Q15, compared with Metropolitan France's 10.2%. Furthermore, the department's economy is supported by a strong and dynamic R&D and higher education sector, concentrating a large number of the country top-ranking higher education institutions as well as public and private research centres.

RATING SENSITIVITIES
A downgrade could result from the department's inability to control operating expenditure, with an operating margin sustainably below 7% or a direct debt to current balance ratio over 13 years (2015: 9.7 years).

A direct debt to current balance ratio of under seven years and restoration of an operating margin consistently over 12 % could lead to an upgrade.