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Fitch Affirms Region of Provence-Alpes-Cote-d'Azur at 'AA-', Outlook Stable
September 15, 2017 / 9:27 PM / 2 months ago

Fitch Affirms Region of Provence-Alpes-Cote-d'Azur at 'AA-', Outlook Stable

(The following statement was released by the rating agency) PARIS, September 15 (Fitch) Fitch Ratings has affirmed the Region of Provence-Alpes-Cote-d'Azur's (PACA) 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 region's long-term debt, including a EUR1 billion EMTN, has been affirmed at 'AA-'. Its EUR300 million commercial paper programme has been affirmed at 'F1+'. The ratings reflect the region's improved operating performance in 2016, robust economic profile and sound financial management, as well as the region's high debt. The Stable Outlook reflects our view that PACA will maintain budgetary and debt metrics that are compatible with the ratings over the medium term, despite an expected increase in debt. KEY RATING DRIVERS According to our base case scenario, we expect PACA's operating balance to remain above EUR300 million in the coming years, compared with EUR348.7 million in 2016, and the operating margin to be 16%-17% in 2017-2020, down from 22.2% in 2016. We do not expect PACA's operating balance to be affected by the transfer of French departments' main transportation competencies (school and inter-urban transportation) to the respective regions in 2017. We expect PACA's operating revenue and expenditure to increase by around EUR290 million each in 2017. However, as a result of the increased level of operating revenue, the transfers will lead to a deterioration of the operating margin. We expect operating revenue to increase 1.4% a year in 2017-2020 (at the same scope of competencies). As with other French regions, PACA should benefit from a higher share of dynamic tax revenue in the coming years (the levy on corporate value-added tax proceeds to double as of 2017, offsetting the department's transfer of transportation competencies; plus a share of the value-added tax in exchange for fixed state transfers from 2018). We expect operating expenditure to increase nearly 6% in 2017 (at the same scope of competencies), due to a bounce-back effect of the sharp 5.4% decline observed in 2016. It should slow to less than 1% a year in 2018-2020 as the region aims to maintain tight control over spending. Fitch will also monitor PACA's legal dispute with train operator SNCF Mobilites over the amount of the rail transportation subsidy owed by the region as it could have a significant impact on spending in the coming years. The region's subsidies to SNCF Mobilites accounted for 19.3% of PACA's operating expenditure in 2016. PACA's capital expenditure should increase significantly to around EUR690 million in 2017, from EUR510.7 million in 2016 (28.2% of total expenditure, excluding debt repayments), as the region has purchased three new administrative buildings, totalling around EUR140 million, to optimise property management. In line with the region's investment programme, capital expenditure should be close to EUR550 million in 2018 and EUR500 million in 2019-2020. We expect the self-financing capacity to average 75% in 2017-2020, leading to an increase in debt. Our base case scenario forecasts PACA's direct risk will reach EUR3.2 billion at end-2020, from EUR2.62 billion at end-2016 (excluding commercial paper's outstanding issues). Accordingly, PACA's direct risk payback ratio is likely to deteriorate towards 12 years over the medium term, from 8.8 years in 2016. We also expect debt service coverage to weaken in the coming years, but it should remain below 80% of the operating balance in the medium term. PACA's economy is robust and dynamic, supported by many high value-added and innovative sectors along with tourism and a still large industrial base. It is also well-connected to national and international transportation networks and attracts many new foreign investments. Negatively, PACA's unemployment rate is above the national average (11% in 1Q17 vs. 9.3% in metropolitan France) and poverty rate is high (17.3% in 2013 vs. 14% in metropolitan France). Control over operating spending is one of the region's management priorities, as reflected in a sharp decrease in operating spending in 2016. Fitch expects PACA will continue to implement operating cost-cutting measures in the coming years to manage its debt ratios. 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; 13.1% in PACA). On the expenditure side, Fitch believes that the regions, unlike departments, have autonomy in the implementation of public policies as most of their statutory mandates are not decided at the state level. RATING SENSITIVITIES A weakening of budgetary performance or an increase in debt, leading to debt servicing (capital plus interest) exceeding the operating balance or a direct risk payback ratio declining towards 15 years could lead to a downgrade. An improvement in budgetary performance leading to a direct risk payback ratio below eight years on a sustained basis could lead to an upgrade. 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 Christophe Parisot Managing Director +33 1 44 29 91 34 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: 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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