September 8, 2017 / 8:12 PM / 10 months ago

Fitch Affirms City of Strasbourg at 'AA'; Outlook Stable

(The following statement was released by the rating agency) PARIS, September 08 (Fitch) Fitch Ratings has affirmed the City of Strasbourg's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AA' with Stable Outlook. The Short-Term Foreign Currency IDR has been affirmed at 'F1+'. The ratings reflect the city's tax flexibility and moderate level of debt, sound governance and a well-diversified economy. The city's operating performance remains weak for the 'AA' category. KEY RATING DRIVERS Fiscal Performance (Neutral) In 2016 the city posted better-than-expected budgetary performance with a current margin of 10.4%, versus 10.1% in 2015. This was due to a 2.5% increase in tax rates and tight control of operating expenditure, which more than offset a reduction in state transfers. The completion of major projects has also allowed the city to significantly reduce its investments and cut back on debt requirements. According to Fitch's base case scenario, the city's current margin will slightly weaken in 2017 to around 9%, driven by a final reduction in state transfers. It is, however, expected to remain close to 9% over 2017-2020 due to moderate growth in tax revenue, stable transfers from both the state and the Eurometropole of Strasbourg (AA/Stable/F1+), and strict control of staff costs. The city also benefits from large fiscal flexibility underpinned by rate-setting autonomy over 90% of its tax revenue (or 46% of its operating revenue) and moderate fiscal pressure. Debt, Liabilities and Liquidity (Neutral) We expect capital expenditure to stabilise at about EUR85 million per year over 2017-2020, an 18% decline from the 2012-2016 average as major projects are now completed. The self-financing share of capital expenditure before debt repayment may decline to below 100% in 2017-2020 (2016: 141%), leading to an increase in debt. Between 2012 and 2016, Strasbourg's direct debt increased on average 18% per year. This trend is expected to continue in our base case scenario, albeit at a much slower rate. The debt payback ratio is expected to be around eight years by 2020 (2012-2016 average: six years), below our negative rating sensitivity of 10 years. As a percentage of current revenue, direct debt should remain below 75% in the medium term (63% at end-2016). The city's indirect risk is high, at EUR386 million at end-2016. However, it relates almost exclusively to social housing entities, which are considered low-risk. Cash flows are predictable and prudently managed. Short-term funding is adequate and relies on committed credit lines totalling EUR49 million. Management and Administration (Strength) Strasbourg benefits from sound governance, as its full integration with the Eurometropole facilitates economies of scale and policy co-ordination. Its ability to bolster operational efficiency and contain operating cost growth is underpinned by a skilled administration. Economy (Strength) Long-term growth prospects are underpinned by the city's location within one of Europe's most industrialised areas, the city's special status as the seat of several European institutions, and a positive demographic trend. Institutional Framework (Neutral) The solvency of French sub-nationals is underpinned by the quality of their financial and administrative framework, which makes debt servicing one of their top spending priorities. The fiscal autonomy of French municipalities is higher than that of regions and departments, as they enjoy significant rate-setting power over most of their taxes (the City of Strasbourg has autonomy over half of its operating income). RATING SENSITIVITIES An operating margin below 8% (2016: 10%) and the debt payback ratio weakening to 10 years could lead to a downgrade. An upgrade could be triggered by a sustained improvement of the debt payback ratio to below four years, provided the sovereign's rating (AA/Stable) is also upgraded. Contact: Primary Analyst Nicolas Miloikovitch Analyst +33 1 44 29 91 89 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Pierre Charpentier Analyst +33 1 44 29 91 45 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 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 Solicitation Status here Endorsement Policy here 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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