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Fitch Revises Guadeloupe's Outlook to Negative; Affirms at 'AA-'
March 14, 2014 / 4:42 PM / 4 years ago

Fitch Revises Guadeloupe's Outlook to Negative; Affirms at 'AA-'

Link to Fitch Ratings' Report: Department of Guadeloupe - Rating Action ReportPARIS, March 14 (Fitch) Fitch Ratings has revised the Department of Guadeloupe's rating Outlook to Negative from Stable. It has also affirmed the department's Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'AA-' and Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: High: Fitch expects the department's current margin to have deteriorated to 4.8% of current revenue in 2013 from 7.9% in 2012, mainly due to higher social spending. Fitch expects performance to weaken in the medium term - with a current margin of 3.8% by 2016 - due to sluggish operating revenue growth and increasing social spending. The structural economic weaknesses of the archipelago stem from its remoteness and the small size of its local market, resulting in higher social expenditure than other departments. Guadeloupe's budget shows limited flexibility, as operating revenue is mostly based on non-modifiable taxes and state transfers, and operating expenditure is driven by rigid items such as staff costs, mandatory transfers and state-defined social spending. Possible shrinkage in departmental current transfers would provide some, albeit limited, operating spending flexibility, allowing Guadeloupe to concentrate on its core competencies. Medium: The department benefits from the special status of 'outermost region', allowing it to receive special grants from the European Union to offset its economic weaknesses. Guadeloupe's ratings also reflect the following rating drivers: We forecast higher debt in the medium term due to lower self-financing of capital expenditure. The department aims to keep its debt payback ratio under four years, by ensuring that its cash reserves represent a minimum of 30 days of total expenditure over the medium term. Fitch, however, estimates that debt payback could exceed slightly more than five years in 2016, which would be negative for the ratings. Compared with peers, Guadeloupe had low debt of EUR98.7m in 2013 with a debt payback ratio of 3.6 years. When its cash balance is taken into account, its net direct risk is negative at EUR25m. The department holds high-risk leveraged debt instruments but these represent a small 9% of total outstanding debt. Capital expenditure decreased slightly to EUR117.9m in 2013. With planned annual investments of an average of EUR103m, self-financing is forecast to decline to about 48% in 2016 from 93 % in 2013 due to a weaker current balance. Fitch believes the department has headroom to scale down capex, particularly in subsidies, which represent about 20% of annual capital expenditure. RATING SENSITIVITIES A downgrade could result from a deterioration of the department's debt payback ratio to above five years or a decline in the current margin to below 5% on a sustained basis. KEY ASSUMPTIONS Our base case scenario relies on the following assumptions: -Tax rates will remain stable, with slight variations of the tax base -The devolution reform in France will have a slight positive financial impact -Operating expenditure will remain controlled, with a maximum of 1.9 % per year increase on average over 2013-2016 -Capital expenditure will average EUR103m per year over the medium term Contact: Primary Analyst Arnaud Dura Associate 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 Vladimir Redkin Senior Director +7 495 956 9901 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, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 9 April 2013 on Applicable Criteria andALL 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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