(The following statement was released by the rating agency)
Nov 27 - Fitch Ratings has affirmed the Region of Provence-Alpes-Cote d'Azur's (PACA) Long-term local and foreign currency ratings at 'AA' and Short-term foreign currency rating at 'F1+'. The Outlook is Negative. A full list of rating actions is at the end of this commentary.
PACA's ratings are underpinned by its solid operating performance, comfortable level of investment self-financing, and a high level of debt mitigated by sound debt payback ratios. The Negative Outlook reflects Fitch's view of the growing risk of financial profile deterioration resulting from a combination of stagnant revenue and rigid expenditure.
A downgrade could result from a direct risk payback ratio consistently above eight years if the region fails to adjust operating and capital spending to the level of revenue.
PACA is the third-largest French region in terms of population and GDP. Its economy is well diversified and relies on the region's services sector, vibrant tourism and high value-added industries.
The operating balance rose to EUR441m in 2011, or 27.4% of operating revenue, from EUR414m in 2010, due to the positive outcome of the recent fiscal reform and a one-off accounting period adjustment. Fitch estimates that the current margin will decrease to 21.7% of current revenue in 2012 from 24% in 2011, due to a 2.3% rise in operating expenditure and 1% fall in revenue.
PACA's operating revenue lost most of its flexibility in 2011 as a result of fiscal reform, and will be further negatively impacted by declining state transfers and by the drag of weak economic performance on tax base growth. Therefore, Fitch expects operating revenue to remain stable from 2012 to 2015 and exert negative pressure on the region's operating balance.
Stagnant revenue will force the region to curb operating spending growth to maintain a comfortable current margin. The pressure of both dynamic and rigid expenditure (staff costs, train services, training) is expected to lead to a spending re-prioritisation, aimed at keeping the operating margin above 22% until 2015. Fitch forecasts stable operating spending in 2013, but believes expenditure will resume a 1.5% growth rate in 2014 and 2015. Operating margin would thus fall to 22.6% of operating revenue by 2015.
Capital expenditure self-financing, after debt repayment, remained comfortable at 56% in 2011. Fitch expects it to have increased to 73% in 2012 due to rising capital revenue (underpinned by an earmarked fuel tax) and declining capital spending (EUR505m, from EUR528m in 2011). Fitch expects the region to achieve at least part of its medium-term capital expenditure scaling-down target, which would lead to an average self-financing rate of 66% from 2012 to 2015, and to capital expenditure of EUR450m in 2015.
PACA's debt ratios remained high in 2011 as direct risk (including finance leases) accounted for 121.9% of current revenue and 5.1x current balance. Fitch expects direct risk to grow in 2012 to 131.4% of current revenue and 6.1x current balance. The debt structure is low-risk and the region will provision its significant bullet repayments scheduled for 2023 and 2024. According to Fitch's base case scenario, direct risk could reach 150% of current revenue by 2015, resulting in a payback ratio of 8.3 years, incompatible with the current ratings.
Liquidity management is sound and underpinned by predictable cash flows and regular use of the EUR300m commercial paper (billets de tresorerie; BT) programme. The refinancing risk of BT issuances is mitigated by committed revolving credit lines of EUR262m.
The region's administration is sophisticated, with a track record of reliable budgeting and financial forecasts. PACA has declared its willingness to be one of the first local authorities to achieve, in the medium term, an annual financial certification.
The rating actions are as follows:
- Long-term foreign and local currency ratings: affirmed at 'AA'; Outlook Negative
- Short-term rating: affirmed at F1+
- EUR1bn EMTN programme: affirmed at 'AA'
- EUR300m BT programme: affirmed at 'F1+'
(Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.firstname.lastname@example.org, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.email@example.com)
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