November 24, 2017 / 3:08 PM / a year ago

Fitch Affirms 8 French Public Hospitals' Joint Bond Issue at 'A+'

(The following statement was released by the rating agency) PARIS, November 24 (Fitch) Fitch Ratings has affirmed the French Public Hospitals' Joint Bond Issue CHU de France Finance (CHU 2015) at long-term local currency senior unsecured rating 'A+'. This is the fourth issue of a pool of French public hospitals and the second rated by Fitch. The EUR100 million bullet bond has a maturity of 10 years and was used to finance hospitals' investments. The bond represents an unsecured and unsubordinated obligation of each obligor. Each hospital's share of the total bond issue ranges from 4% to 24%. KEY RATING DRIVERS The obligors jointly participate in the issue with no solidarity mechanism. In the absence of cross-repayment obligations, credit enhancement or liquidity reserves, the bond would be in default if any of the joint issuers fails on their obligations. Fitch views the credit profile of a joint bond issue that does not provide mutual support or solidarity mechanisms among the different obligors, or collateral backing as dependent on the weakest participant. Consequently, Fitch assesses the issue based on the credit quality of the weakest participant. Fitch applied its public sector entity criteria with a top-down approach to assess each obligor (French public health establishments; PHE) as they are classified as credit-linked entities: Regional and University Hospital (CHU) of Rennes, CHU of Bordeaux; Regional Hospital Centre of Metz-Thionville, Hospices Civils of Lyon (HCL), CHU of Angers, CHU of Montpellier, CHU of Nimes and Hopitaux Universitaires de Strasbourg. Each member of the pool has mandated a health care cooperation group, GCS CHU de France Finance, to represent them and to act on their behalf. This entity is a public law body whose objectives are to represent its members before financial partner, and to provide operational support to joint bond issues. Fitch does not view the participation of the obligors in this health care cooperation as an indication of financial solidarity between the members. As a PHE, Fitch expects obligors to benefit from very strong state support in case of need. The French government does not explicitly guarantee obligors' debt, but Fitch assumes that the state would be willing to provide timely support in case of need. By virtue of their status, the assets and liabilities of the obligors cannot be liquidated or transferred to entities other than the French state. Moreover, as a PHE, the debt of obligors is included in social security debt, which is accounted as general government debt under the Maastricht Treaty. Due to their status as regional hospitals, obligors have a strategic role in the provision of health care service in their regional territory. Fitch believes this means that if they were in financial distress, they would benefit from stronger and more immediate state support than other hospitals. Due to PHEs' inclusion in the general government accounts and the state's role in financing (through decisions on tariff-setting and general grants), Fitch views the obligors' links with the state as strong. At end-2016, obligors' revenue from the government represented an average of 77% of total operating revenue. Moreover, the state monitors regional health policies and exercises budgetary and financial control over the hospitals through the Regional Health Agency (ARS; state agency). Borrowings are subject to approval by the state if the PHE does not comply with certain budgetary ratios. At end-2016, four (out of the total eight) obligors continued to be subject to such approval. Each obligor's liquidity is also underpinned by the tight state control through regional committees and potential extraordinary transfers from the state in case of need. Some of the obligors (CHU of Bordeaux, Hospices Civils de Lyon and CHU of Montpellier) are allowed by law to issue a French commercial paper programme. In view of the safeguards, Fitch views a rating differential of three notches from the French sovereign (AA/Stable/F1+) is an appropriate rating floor for French PHEs. Obligor's budgetary framework for 2017 is based on the changes planned under the national objective of healthcare expenditures (2.1% growth). These changes will lead to reductions of both tariffs and state transfers. Although Fitch expects obligors to improve their budgetary profiles due to efficiency efforts the share of staff costs on total expenditure and the civil servant status of most staff members will constrain spending flexibility. At end-2016, with about 15,000 beds, the obligors' budgetary performance was fairly homogenous. The obligors' net debt/EBITDA averaged 2.4x at end-2016 (2015: 2.8x). Given ARS's financial aid, each obligor's self-financing capacity was sufficient to cover capital debt repayment. Each year, the state controls hospitals' budget performance and follows their investments through the inter-ministerial committee for performance and modernisation. All eight obligors' liquidity cushion is assessed by Fitch as weaker. However, obligors benefit from predictable cash-flow, as their main treasury inflows from the state are set by law. RATING SENSITIVITIES A downgrade of the bond rating would most likely follow a downgrade of the sovereign rating due to their rating links. A dilution of the PHE's legal status, control from the government or weakening financial support from the state could also trigger negative rating action. An upgrade would most likely result from a reinforcement of commitments from the government or a sovereign upgrade. Contact: Primary Analyst Arnaud Dura Director +33 1 44 29 91 79 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Pierre Charpentier Analyst +33 1 44 29 91 45 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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 Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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