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Fitch Affirms Department of La Manche at 'AA-'; Outlook Stable
October 20, 2017 / 8:17 PM / a month ago

Fitch Affirms Department of La Manche at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) PARIS, October 20 (Fitch) Fitch Ratings has affirmed the French Department of La Manche's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AA-' with Stable Outlooks and Short-Term Foreign-Currency IDR at 'F1+'. The affirmation reflects the sound operating margin of La Manche, which we expect to remain around 13% in the medium term, its tax leeway and moderate debt. The Stable Outlook reflects our expectations that its revenue and expenditure will continue to be little changed. Fitch does not expect the direct risk payback ratio to exceed seven years over the medium term. KEY RATING DRIVERS In Fitch's base-case scenario, we expect the implementation of cost-cutting measures and stabilising social spending will allow the department to control its operating expenditure growth. Combined with expected mild operating revenue growth, this should translate into an operating margin of 12.9% in 2020, compared with an expected 13.2% for 2017. We expect the operating balance to be sufficient to cover interest payments by an average 6.4x over 2018-2020 (6.1x expected at end-2017). Fitch views the department's tax flexibility as a positive rating factor. La Manche has the power to set their property tax, which represents about 25% of total revenue (compared with an average of 20% for French departments). While the department has indicated that it does not intend to increase the property tax rate, Fitch estimates that an increase to the neighbouring department's level (Department of Orne) would yield roughly an additional EUR30 million based on the estimated 2017 fiscal base. Fitch views the social spending structure of La Manche as more favourable than other departments', given its lower-than-national average unemployment rate. However, French departments have less flexibility than local and regional governments as 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. Fitch expects capital expenditure to remain stable on average at EUR78 million a year in 2018-2020, up from an expected EUR72 million for 2017. Nonetheless, Fitch estimates that the department's self-financing of capital expenditure (current balance and capital revenue, net of debt repayment, over capital expenditure) will remain sound on average at 104.1% over 2018-2020, leading to a slight decrease in outstanding debt to EUR322.1 million in 2020 from an expected EUR332.3 million for 2017. La Manche aims to keep the direct risk payback ratio at below seven years and to achieve a minimum current balance of EUR45 million. With direct risk payback expected to average 6.5 years over 2018-2020 (with a maximum of 6.8 years at end-2019), we believe La Manche's financial objectives are achievable, underpinned by a track record of reliable financial forecasting. Fitch views La Manche's financial management as highly efficient, particularly the department's forecasting ability, which allows control over annual budget and debt commitments. Debt and liquidity management is conservative. Guaranteed debt is high in absolute terms (EUR311 million at end-2016), but Fitch views its risk as low, since the guarantees are mostly to low-risk regulated social housing entities. Fitch views La Manche's economy as strong compared with global peers. The department's GDP was estimated at EUR23,400 per inhabitant in 2012 (latest available data). In 2Q17, the unemployment rate (7.5%) was lower than the national average (9.2%), resulting in lower social spending than other departments. The low unemployment is particularly important in our assessment of La Manche's economic profile as the department's expenditure is weighted towards social aid to the unemployed. Fitch views the institutional framework as neutral to the ratings. 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. RATING SENSITIVITIES A downgrade could result from La Manche's inability to control operating expenditure and to adjust capital expenditure to the department's self-financing capacity, resulting, for instance, in a debt payback ratio above 12 years. An improvement in the current margin for several consecutive years, combined with controlled capital expenditure, leading for instance to a debt payback ratio consistently lower than five years, could lead to an upgrade, although Fitch views this unlikely. Contact: Primary Analyst Arnaud Dura Director +33 1 44 29 91 79 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 24 05 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. Additional information is available on www.fitchratings.com 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#solicitation 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. 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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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