October 20, 2017 / 8:17 PM / 2 months ago

Fitch Affirms French Region of Occitanie at 'AA'; Outlook Stable

(The following statement was released by the rating agency) PARIS, October 20 (Fitch) Fitch Ratings has affirmed the French Region of Occitanie's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA' with Stable Outlooks and Short-Term Foreign-Currency IDR at 'F1+'. Fitch has also affirmed Occitanie's EUR300 million French commercial paper programme (Titres de creances negociables; TCNs) at 'F1+'. KEY RATING DRIVERS The ratings of Occitanie factor in its sound operating margin, which we expect to be around 20% over 2017-2020, and its favourable socio-economic profile. The Stable Outlook reflects Fitch's view that the region's debt payback ratio will reach a maximum of 6.1 years in 2020, despite expectation of an increase in debt due to sizeable capital expenditure in the medium term. Occitanie's IDRs reflect the following key rating drivers: According to our base case scenario, Fitch expects debt will grow faster than peers', to 114% of current revenue by 2020 (from an expected 77.5% at end-2017). Although the debt-to-current balance ratio is projected to reach a maximum of 6.1 years by 2020 (4.1 years expected at end-2017), Fitch views these ratios as commensurate with the ratings. Direct debt servicing-to-operating balance will remain sound, with a maximum of 34.7 % in 2020 (22.7% expected at end-2017). Liquidity is underpinned by predictable cash flows and diverse credit lines. Occitanie's liquidity management is also underpinned by the issuance of French commercial paper with a ceiling of EUR300 million. Occitanie has sufficient available bank loans and credit lines to cover its liquidity needs. Capital expenditure will remain high and increase gradually to EUR925.6 million by 2020, from an expected EUR830.3 million at end-2017. Capital spending flexibility is limited given Occitanie's involvement in large investment projects, especially in transport. Fitch expects the operating margin to remain sound at 20%, after adjusting for the increase in size of the regional budget by about EUR400 million due to transport and other responsibilities, which implied a drop in the operating margin of about 5 percentage points from our previous forecasts prior to adjustments. Cuts in state transfers will be slightly offset by the implementation of cost-cutting measures, the growth of some taxes and the transfer of some tax revenue in the coming years (notably a share of the value-added tax in exchange for fixed state transfers from 2018). The department's transfer of transportation competencies is fully offset by the doubling of levy on corporate value-added tax as of 2017. Active debt management would limit the rise of interest expense despite growing debt. This would yield a current margin of 18.6% in 2020 (18.9% expected at end-2017), compatible with other 'AA' peers'. With EUR153.7 billion of GDP in 2014, Occitanie accounted for 7.2% of national GDP. The region is one of the most attractive French business destinations, particularly for investments in research and development. Its unemployment rate (11 % in 2Q17) remains above the national average (9.2%), despite its dynamic economy. Over 2012-2017, the levy on corporate value-added (EUR578.5 million expected at end-2017; 25.4 % of total operating revenue) increased by an average of 4.3 % compared with the metropolitan average of 3%. Fitch views Occitanie's financial management as sophisticated and prudent, particularly in terms of the region's forecasting ability, which allows Occitanie to control its annual budget and debt commitments. Debt and liquidity management is conservative. The political framework is stable with a cross-party consensus on key issues, especially financial strategy. The solvency of French subnationals is underpinned by the quality of their financial and administrative framework, which makes debt servicing one of their top spending priorities. French regions' fiscal autonomy is lower than that of departments and municipalities as their rate-setting power is limited to vehicle registration certificates (10.1% of their operating revenue in 2016; 10.4% in Occitanie). On the expenditure side, Fitch believes that regions, unlike departments, have autonomy over the implementation of public policies as most of their statutory mandates are not decided at the state level. RATING SENSITIVITIES An upgrade of France's sovereign ratings (AA/Stable), combined with an improvement of the region's budgetary performance due to a growing economy, could result in an upgrade. A downgrade could result from weaker budgetary performance resulting in a debt-to-current balance ratio consistently of over eight years. A sovereign downgrade would also be mirrored in Occitanie's ratings. 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 Christophe Parisot Managing Director +33 1 44 29 91 34 Committee Chairperson Raffaele Carnevale Senior Director +39 028 79 08 72 03 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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