(The following statement was released by the rating agency)
Sept 17 -
-- The French City of Cannes operates under a predictable and well-balanced institutional framework for French cities, has a positive liquidity position, and very positive financial management, in our view.
-- We are affirming our ‘AA’ long-term rating on Cannes.
-- The stable outlook incorporates our view that Cannes will be able to limit its deficit after investments.
On Sept. 17, 2012, Standard & Poor’s Ratings Services affirmed its ‘AA’ long-term issuer credit rating on the French City of Cannes. The outlook is stable.
The rating on Cannes is based on our view of the “predictable and well-balanced” institutional framework for French cities, the city’s “very positive” financial management, and its “positive” liquidity position, as our criteria define these terms. It also incorporates Cannes’ solid budgetary performance and reduced risks associated with contingent liabilities. The rating is constrained by the city’s limited budgetary flexibility, especially on the revenue side, and by its high, albeit decreasing, debt burden.
We view Cannes’ financial management as “very positive” for its credit standing. This reflects our opinion of the management’s prudent and well-defined financial policies, backed by extremely good monitoring of operating expenditure, well-defined financial objectives, medium-term forecasts, and high financial transparency. We consider that Cannes’ risks related to contingent liabilities have declined, especially with regard to the scope and potential financial impact of litigation risks.
Cannes has reported solid budgetary performances since 2009. In 2011, its operating balance reached a high 14.5% of operating revenue, up from 12.6% in 2010, reflecting sharp control over operating expenditure growth (limited to 0.6%). Operating revenue grew 2.8% in the same period, partly thanks to one-off items. In addition, capital investment in 2011 was a low EUR48 million, in line with EUR51 million in 2010, but well below its 2005-2008 levels of EUR81 million annually. Cannes also reported solid capital revenues (including asset sales) in the year. The city therefore recorded another surplus after capital accounts of total revenues at 7.2%, versus the 9.4% figure in 2010.
Under our base-case scenario, we forecast that Cannes’ operating balance will deteriorate to about 9% at end-2014, despite continued expenditure controls. This reflects our anticipations for slow growth in taxes, stable state operating transfers, and a negative impact from a national reform that modifies tax redistribution among cities. Yet, thanks to still sound operating balances and high capital revenues (EUR33 million per year in 2012-2014, including asset sales), we project under our base-case scenario a limited negative balance after capital accounts of 0.5% of total revenue on average in 2012-2014, despite larger investments (averaging EUR60 million per year in 2012-2014).
We view Cannes’ debt burden as quite high, at 114% of operating revenue at end-2011 (representing 7.8 years of the operating balance), but we project it will decrease to about 100% in 2012-2014 under our base-case scenario.
Cannes has limited budgetary flexibility, especially on the revenue side, given its decision to fully freeze, until the end of the current administration’s mandate in 2014, the rates of local direct taxes (which totaled 55% of operating revenue in 2011). Despite mostly fixed costs, the city’s management has curbed operating expenditure growth in recent years and we understand it aims to maintain tight expenditure controls.
We view Cannes’ liquidity position as “positive” under our criteria. Thanks to sizable asset sales and positive operating cash flows, the city reported sizable cash holdings of EUR27 million at end-August 2012 (of which it deposited EUR25 million in term deposits with the French Treasury), excluding EUR18 million held in ancillary budgets. This covers over 80% of Cannes’ estimated debt service over the coming 12 months.
At end-August 2012, Cannes also had EUR41 million of fully available revolving credit lines. Cannes’ cash holdings and these revolving lines represent over 2x its estimated debt service over the coming 12 months.
Debt service will reach about EUR35 million per year on average in 2013-2017 as five of Cannes bullet bonds mature. We consider these bond redemptions as manageable because the city will likely repay part of them from its available cash and its operating balance, and refinance the remainder. If necessary, Cannes may also pre-fund these debt repayments using its revolving lines.
The stable outlook incorporates our view that Cannes will be able to limit its deficit after investments. Under our base-case scenario, we think Cannes will maintain its sound budgetary performance over the coming two years through its prudent management and despite increasing capital investments.
Our downside scenario incorporates more relaxed controls over operating expenditure, stagnating operating revenue, and more limited asset sales. This would translate into large deficits after capital accounts and tax-supported debt exceeding 130% of operating revenue in 2014. This could prompt a negative rating action on Cannes, because we would view the city’s budgetary performance and financial management less positively.
Ratings downside could stem from Cannes’ potential re-initiation of a shelved EUR75 million underground extension of the city’s congress center project, if the financial options to fund this project significantly increase itsfinancial commitments.
Our upside scenario factors in Cannes’ sharper control over operating expenditure and more steady growth in operating revenue and larger capital revenue (including asset sales), resulting in surpluses after capital accounts in excess of 5% in 2012-2014. Tax-supported debt would therefore decrease below 90% of operating revenue at year-end 2014. If this occurs, we may consider raising the rating.
However, we think both the downside and upside scenarios are unlikely to materialize over the next two years.
We understand that from 2014 Cannes will become part of an integrated intercity grouping (“communaute d‘agglomeration”). We don’t incorporate this in our scenarios at this point because we currently have no visibility on the responsibilities that could be transferred, or on the financial impact on the city from associated transfers of revenue and expenditure, and potential debt transfers.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Institutional Framework Assessments For International Local And Regional Governments, Dec. 19, 2011
Cannes (City of)
Issuer Credit Rating AA/Stable/--
Senior Unsecured AA