December 1, 2017 / 9:14 PM / a year ago

Fitch Affirms Department of Bouches du Rhone at 'AA'; Stable Outlook

(The following statement was released by the rating agency) PARIS, December 01 (Fitch) Fitch Ratings has affirmed the Department of Bouches du Rhone'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. The department's EUR500 million EMTN programme has been affirmed at 'AA'. The affirmation reflects Bouches du Rhone's track record of sound operating performance, moderate debt levels, proactive management and a diversified economy. The Stable Outlook reflects our expectation that the department will keep budgetary and debt metrics compatible with the ratings in the medium term, despite an expected surge in debt. KEY RATING DRIVERS According to our base case scenario, Bouches du Rhone's operating margin should improve to around 14.5% in 2017 and on average be close to 13% in 2018-2020, compared with 13.3% in 2016. Property transfer duties (15.2% of the department's operating revenue in 2016) are expected to increase around 15% in 2017 due to a strong real estate market. This should bring the department an extra EUR55 million in operating revenue in 2017, offsetting a EUR43 million drop in state transfers. The evolution of property transfer duties will be key to the department's operating performance in the coming years; our base case scenario factors in a prudent assumption of a 5% drop in 2018. We expect the department's operating expenditure to grow around 1% a year in 2018-2020 (at the same scope of competencies). Social spending growth is being progressively scaled down, especially social benefits as the number of beneficiaries continues to decline. Staff costs (17.1% of operating spending in 2016) is likely to be the most dynamic spending item in 2018, driven by the impact of national measures. According to Bouches du Rhone's investment programme, capital expenditure should average EUR450 million a year in 2017-2020 (around 18% of total expenditure), compared with an estimated EUR436.5 million in 2016 (Fitch-adjusted). We expect the department's self-financing capacity to average 70% in 2018-2020 (2016: 80.1%), thus leading to an increase in debt. Bouches du Rhone's direct debt grew significantly in recent years to EUR721.5 million at end-2016 (32.2% of current revenue), from EUR267.4 million at end-2012 (12.5%). According to our base case scenario, it will continue to grow to around EUR1.15 billion at end-2020, but remain reasonable at around 50% of current revenue. We expect the department's debt sustainability to remain strong with a direct risk payback ratio close to four years over the medium term: (2016: 2.5 years). Debt service (capital plus interest) should remain well-covered and represent less than 35% of operating balance in the coming years. Bouches du Rhone is a largely populated department with around 2 million residents. Its economy is strong from an international perspective, underpinned by a high-level research centre, strong international communication networks and a diverse tax base. However, the department's socio-economic indicators are below the national average. The poverty rate was 18.6% in 2014, compared with 14.1% in metropolitan France, and the unemployment rate is also above average (11.2% in 2Q17 vs. 9.2% for metropolitan France). This translates into high social benefit spending (23.3% of operating expenditure in 2016). Bouches du Rhone benefits from strong governance, as evident in accurate budget planning and debt management. The department's administration implemented strong cost-cutting measures in 2016 following cuts in state transfers and aims to maintain spending restraint in the coming years. Fitch will monitor the department's ability to achieve its objectives. The solvency of French subnationals is underpinned by the quality of their financial and administrative framework, which makes debt servicing one of their highest spending priorities. French departments' fiscal autonomy is higher than that of the regions, but lower than municipalities, as their rate-setting power is limited to the property tax (around 20% of their current revenue in 2016; 16.3% in Bouches du Rhone). On the expenditure side, departments have less flexibility than other French local and regional governments (LRGs) as their main compulsory responsibility is the implementation of social welfare measures passed by parliament. RATING SENSITIVITIES Deterioration of the direct risk-to-current balance to six years could lead to a downgrade. An upgrade could be triggered by a direct risk-to-current balance ratio of around two years on a sustained basis, provided the French sovereign's rating (AA/Stable/F1+) is also upgraded. Contact: Primary Analyst Pierre Charpentier Analyst +33 1 44 29 91 45 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Arnaud Dura Director +33 1 44 29 91 79 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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