October 20, 2017 / 8:22 PM / a month ago

Fitch Affirms Paris at 'AA'; Outlook Stable

(The following statement was released by the rating agency) PARIS, October 20 (Fitch) Fitch Ratings has affirmed the City of Paris'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. Fitch has also affirmed the city's EUR6 billion euro medium-term notes (EMTN) programme and senior unsecured notes at 'AA'/'F1+'. Paris's EUR800 million commercial paper programme (TCN; Titres de creances negociables) has also been affirmed at 'F1+'. Paris's ratings factor in the city's sound operating margin, which we expect to remain around 10% in the medium term, with a debt-to-current balance of around 10 years. The ratings also reflect Paris's high socio-economic wealth indicators and budget flexibility, which offset risks of deterioration in the budgetary performance, in turn resulting in the Stable Outlook. KEY RATING DRIVERS We estimate that the operating margin will remain sound, reaching 9.6% in 2020 (9.5% expected at end-2017). Active debt management should also allow the current margin to remain sound at an average of 8.4% per year over 2017-2020, compared with 7.9% expected at end-2017. Fitch views Paris as having substantial tax leeway due to fairly low tax pressure, although the city has ruled out using its tax rate flexibility. Fiscal flexibility is also underpinned by strong tax base growth, supported by the local economy. This revenue flexibility mitigates the impact of transfer cuts and the rigidity of many operating spending items. Fitch expects that the city's debt metrics will remain compatible with the current ratings over the medium term. According to Fitch's base-case scenario, we project that Paris's debt will edge towards EUR6.6 billion in 2020 or 94% of current revenue, up from EUR5.5 billion and 80% expected at end-2017. Also interest coverage by the operating balance should remain sound at around 4.9x in 2017-2020. We expect the city's direct debt payback ratio to edge towards 12 years in 2020 from an expected 10 years at end-2017. This increase is mitigated by Paris's strong access to capital markets through the city's EUR6 billion EMTN programme and revenue flexibility. Liquidity is strong due to reliable and well-diversified funding, predictable cash flows and prudent debt management. Fitch estimates Paris will maintain its sound self-financing capacity (SFC; current balance plus capital revenue) at an annual average of 75% of capital expenditure over 2017-2020 (63.5% expected at end-2017). This is despite heavy investments on average of EUR1.6 billion per year over 2017-2020 in our base case (EUR1.6 billion expected at end-2017). The city's SFC will be supported by sustained capital revenue and a broadly stable current balance. Guaranteed debt is high in absolute terms (EUR9.2 billion at end-2016). We view this debt as low-risk as it largely comprises long-term loans taken on by state social housing entities. These entities - as with Paris's numerous other dependent public-sector entities (PSEs) - are tightly supervised and mostly self-funded - while demand for affordable housing is healthy. Compared with international peers, the Parisian economy is strong. The city is France's main political, administrative and economic centre. At EUR53,921, Paris's GDP per capita was equivalent to 2x the 276 EU regions' average in 2014. Paris benefits from hosting many government offices and a well-developed infrastructure. As a capital city, Paris benefits from a large and well-qualified workforce. Paris tends to mirror national trends, but its resilient economy helps contain the unemployment rate (7.4% in 1Q17), structurally below the regional (8.3 %) and national averages (9.3%). Paris is both a municipality and a department, with broad responsibilities ranging from education to culture, roads, urban planning, public utilities and housing. It is also the main member of the Metropole du Grand Paris - created in 2016 - which is an inter-municipal body in charge of housing policy and urban planning over 131 municipalities of the greater Paris area. Fitch views Paris's financial management as highly efficient, particularly the city's forecasting ability, which allows the city to thoroughly control its annual budget and debt commitments. Financial controls and the auditing framework are being strengthened to improve the quality of financial data. In the medium term, the city intends to adopt the annual certification process. RATING SENSITIVITIES A debt-to-current revenue ratio consistently above 120%, combined with deterioration in budgetary performance, would result in a negative rating action. A sovereign downgrade would also be mirrored in Paris's ratings. Positive rating action on France's sovereign rating could be mirrored in Paris's ratings, provided that Paris also improves its operating performance and debt metrics. 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 Guido Bach Senior Director +49 69 768076 111 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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