OREANDA-NEWS. Fitch Ratings has affirmed the Eurometropole of Strasbourg's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Negative. Its senior unsecured EUR65m bonds (ISIN: FR0011528868) have been affirmed at 'AA'.

The affirmation with Negative Outlook reflects Fitch's unchanged view that Eurometropole's debt ratios could deteriorate in the medium term to levels that may not be compatible with the ratings.

KEY RATING DRIVERS
The 'AA' rating is based on Eurometropole's sound operating performance, strong governance, robust socio-economic profile, as well as high and growing levels of debt.

Eurometropole's operating margin increased to an estimated 26.1% in 2015 from 24% in 2014 against Fitch's expectation of deterioration. Tax revenue was higher than expected, especially the value added tax (11.7% of estimated operating revenue in 2015), which increased 15%. It should be noted, however, that this tax item has evolved erratically in recent years and consequently remains a source of budget volatility for Eurometropole. Operating expenditure (excluding exceptional items) declined by an estimated 1% as staff costs were reduced.

According to our base case scenario, Eurometropole's operating margin will deteriorate in the medium term, due to sharp cuts in state transfers in 2016 and 2017 (EUR11m a year), but will remain sound at 22% on average in 2016-2019. Eurometropole used its tax leeway in 2015 and may continue to do so in the coming years, although this is not factored into our scenario. Eurometropole aims to continue to stabilise its operating expenditure in the coming years by implementing cost-cutting measures, especially in staffing.

Fitch expects capital expenditure to decline progressively to EUR120m in 2018 from an estimated EUR190m in 2015 as Eurometropole scales down its investments programme. Accordingly, despite the expected deterioration in operating performance, the region's self-financing capacity (after debt repayment) should remain fairly sound at above 60% in the coming years, compared with an estimated 70% in 2015. However, it will not be sufficient to stabilise direct debt in the coming years.

Eurometropole's direct debt is high, at 143% of estimated operating revenue in 2015, and this ratio is likely to exceed 160% in the medium term. We also estimate that the debt payback ratio could rise to nine years in 2018 from 6.3 years in 2015. In addition, Eurometropole's debt guarantees have increased in recent years, to EUR1.5bn at end-2015, which represented a high 415% of estimated 2015 operating revenue. However, about 90% are for the benefit of social housing entities, which Fitch views as a highly regulated and, consequently, low risk-sector.

Eurometropole benefits from strong governance, evidenced by accurate budget planning and debt management. The political framework is stable with a cross-party consensus on key issues, especially financial strategy.

Located in Alsace on France's German border, Eurometropole derives some benefits from Germany's dynamic economy. Strasbourg's key economic role is underpinned by the region's status as the seat of several European institutions, including the European Parliament. In January 2016, Strasbourg became the capital of the new region resulting from the merger of the regions of Alsace, Lorraine and Champagne Ardennes. In Fitch's view, these features contribute to the resilience of the local economy.

RATING SENSITIVITIES
A deterioration of Eurometropole's fiscal performance and self-financing capacity, leading to a debt payback ratio weakening towards 10 years, could result in a downgrade. A downgrade of the sovereign (AA/F1+/Stable) will also be reflected in Eurometropole's ratings