September 30, 2016 / 4:06 PM / a year ago

Fitch Affirms French Region of Bretagne at 'AA'; Outlook Negative

(The following statement was released by the rating agency) PARIS, September 30 (Fitch) Fitch Ratings has affirmed the French Region of Bretagne's Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'AA' and Short-Term Foreign Currency IDR at 'F1+'. The Outlook is Negative. Its EUR500m EMTN programme has been affirmed at 'AA' and 'F1+' and its EUR240m short-term commercial paper programme has been affirmed at 'F1+'. The Negative Outlook reflects Fitch's unchanged view that Bretagne's debt metrics may deteriorate in the medium term to levels that are not compatible with the ratings. KEY RATING DRIVERS According to our base case scenario, Bretagne's operating margin should remain sound and stable at around 23% in 2016. Operating revenue is likely to decline 0.7% in 2016, as cuts in state transfers are unlikely to be offset by tax revenue growth, despite a 10.9% tax hike on vehicle registration certificates in early 2016. Nevertheless, we expect operating expenditure to decrease at a similar pace as the region implements cost-cutting measures. We expect the operating margin to slightly weaken to an average of 19% over 2017-2019. This is mainly due to the transfer of the department's main transportation competencies in 2017, which will inflate both operating revenue and expenditure by the same amount and, consequently, weaken the operating margin. Notwithstanding these transfers of competencies, further cuts in state transfers will have a negative, albeit slight, impact on the region's operating performance in 2017. Fitch will monitor developments of possible additional funding for French regions in 2017 as it could significantly improve Bretagne's operating performance in the coming years. The region aims to implement a large EUR2.6bn investment programme in 2016-2021, including the construction of a high-speed rail link to Paris to be delivered in May 2017. Capital expenditure is likely to be close to EUR500m a year in 2016-2019, compared with EUR468m in 2015. We expect the region's self-financing capacity (before debt repayment) to be close to 70% on average in 2016-2019, which would be adequate but not sufficient to stabilise debt. Bretagne's debt increased to EUR835m at end-2015 from nearly EUR300m at end-2011. Our base case scenario forecasts that it will reach EUR1.45bn at end-2019 and represent around 130% of current revenue. As a result, the debt payback ratio is likely to deteriorate towards eight years at end-2019, from a sound 3.9 years at end-2015. Debt service coverage should remain sound, with debt service representing less than 40% of the operating balance over the medium term. Bretagne benefits from strong governance, as evidenced in its accurate budget planning and debt management. The political framework is stable with a cross-party consensus on key issues, especially financial strategy. The region's management aims to reduce operating expenditure by 0.75% a year over the medium term, by limiting staff cost growth at 1.9% on top of cost-cutting measures. In 2015, the region's operating expenditure (excluding European funds items) fell 0.8% and a similar decline is expected in 2016. Bretagne's diversified economy relies on an important agricultural sector, a strong industrial base, and a dynamic services sector. Its unemployment rate (8.8 % in 1Q16) is below the metropolitan average (9.9%), underpinned by a skilled workforce. We expect the regional economy to recover in line with the national economy. RATING SENSITIVITIES Deterioration in the direct debt payback ratio to eight years could result in a downgrade. A downgrade of the sovereign would also be reflected in Bretagne's ratings. The Outlook could be revised to Stable if the direct debt-to-current revenue ratio stabilises at around 100% over the medium term 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 Arnaud Dura Director +33 1 44 29 91 79 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:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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 _id=1012476 Solicitation Status here Endorsement Policy here ail=31 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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