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Fitch Affirms Department of Puy-de-Dome's at 'AA-'; Stable Outlook
June 2, 2017 / 8:17 PM / 2 months ago

Fitch Affirms Department of Puy-de-Dome's at 'AA-'; Stable Outlook

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(The following statement was released by the rating agency) PARIS, June 02 (Fitch) Fitch Ratings has affirmed Puy-de-Dome's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'AA-' with Stable Outlook, and the Short-Term Foreign Currency IDR at 'F1+'. The department's EUR500 million euro medium-term programme ratings have been affirmed at 'AA-' and 'F1+' and EUR100 million commercial paper (CP) programme rating has been affirmed at 'F1+'. The affirmation with Stable Outlook reflects Puy-de-Dome's sound budgetary performance and debt ratios, a diverse economy with high-value added activities, and strict control over expenditure. We expect budgetary performance and debt metrics to slightly weaken in the medium term due to cuts in state transfers and growing social spending, but to remain in line with the 'AA-' rating. KEY RATING DRIVERS Fiscal Performance (Neutral/Stable) Fitch expects the operating margin to weaken slightly over the medium term, to 10% on average in 2017-2020, from an average of 13% in 2012-2016. We expect modest revenue growth below 1% over 2016-2020 (vs. more than 1% in 2012-2016), mostly due to declining state transfers. Operating expenditure is also expected to slow down to less than 1% a year on average (vs. more than 2% in 2012-2016) due to a generally improving economy and cost cutting implemented by the department. As with other French departments, Puy-de-Dome's revenue mix offers limited flexibility as 70% of operating revenue is mainly based on non-modifiable taxes and state transfers. However, some budgetary flexibility stems from Puy-de-Dome's direct tax leeway on the property tax (25% of operating revenue in 2016), although the administration is not contemplating this option to boost revenue. Debt, Liabilities and Liquidity (Neutral/Stable) Fitch expects capital expenditure to stabilise at around EUR95 million per year (EUR105 million a year on average in 2012-2016). As a result of a lower operating margin, Puy-de-Dome's self-financing rate (before debt repayment) is likely to weaken to below 85% in 2017-2020, from above 90% in 2012-2016, leading to an increase in debt. We expect direct risk (including short-term debt and fire department's debt) to increase toward EUR480 million in 2020 (75% of current revenue), from a moderate EUR406 million at end-2016 (65%). This, combined with the expected weakening of operating performance, should lead to a deterioration of the direct risk payback ratio towards an average of seven years in 2017-2020 (2016: 5.8 years). However, this would remain compatible with the ratings. The debt structure is sound (65% at fixed-rate post swaps) 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 CP under a EUR100 million programme, backed by adequate revolving and committed bank credit lines. Liquidity forecasts are detailed and updated regularly. Despite a high level of contingent liabilities, Fitch views contingent risk 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. Management and Administration (Strength/Stable) The ability of the department to implement its budget tightening plan is underpinned by its 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 current margin above 9% and the debt payback ratio below 10 years over the medium term. Economy (Strength/Stable) Puy-de-Dome's socio-economic indicators are slightly better than the national average with an unemployment rate of 8.7% in 4Q16 (against 9.7% for France) and a poverty rate of 12.6% in 2013 (vs. 14.5% for France). Puy-de-Dome benefits from dynamic industries and hosts numerous research facilities and decisional centres. Institutional Framework (Neutral/Stable) Fitch views the institutional framework as neutral to the ratings. The department's main responsibilities include social transfers linked to unemployment, disability and old age dependence, for which policies and eligibility criteria are defined by the state. However, with effect from January 2017, French departments' main transportation competencies have been transferred to their respective regions. Fitch does not expect any significant impact from this transfer on Puy-de-Dome's budgetary performance. RATING SENSITIVITIES An upgrade could be triggered by an improvement in fiscal performance, leading to a direct risk-to-current balance ratio below six years on a sustained basis. A deterioration of the direct risk-to-current balance ratio to above 12 years on a sustained basis could lead to a downgrade. Contact: Primary Analyst Nicolas Miloikovitch Analyst +33 1 44 29 91 89 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Pierre Charpentier Analyst +33 1 44 29 91 45 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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