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Fitch Downgrades Department of Puy de Dome to 'AA-'; Outlook Stable
December 9, 2016 / 9:25 PM / a year ago

Fitch Downgrades Department of Puy de Dome to 'AA-'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Puy de Dome, Department of - Rating Action Report here PARIS, December 09 (Fitch) Fitch Ratings has downgraded the French Department of Puy de Dome's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to 'AA-' from 'AA'. The Outlook is Stable. The Short-Term Foreign Currency IDR has been affirmed at 'F1+'. The department's EUR500m euro medium-term programme's long-term rating has been downgraded to 'AA-' from 'AA' ant short-term rating affirmed at 'F1+'. The EUR100m commercial paper programme has been affirmed at 'F1+'. The downgrade reflects Fitch's view that Puy de Dome's budgetary performance and debt metrics are progressively weakening towards a level that is no longer compatible with a 'AA' rating, despite strong control over spending. This is mainly due to cuts in state transfers and growing social spending. KEY RATING DRIVERS The rating action reflects the following key rating drivers and their relative weights: HIGH Fiscal Performance (Neutral/Stable) Fitch expects the department's operating margin to decline to 11% at end-2016, from 12.6% at end-2015, and further to 10% in the coming years. We expect operating revenue to decrease 0.5% a year in 2016 and 2017, due to sharp cuts in state transfers. Despite the implementation of sharp cost-cutting measures, especially related to old age dependency spending and staff costs, operating expenditure is expected to grow at a moderate pace in the coming years. This is due to growing social spending relative to social benefits, on social accommodation fees and disability, and also because of the central government's decision to increase civil servants wages. We expect capital expenditure to drop to EUR80m-EUR85m in 2016, from EUR100m in 2015, before rising to EUR95m-EUR100m a year in 2017-2019. Accordingly, we expect the department's self-financing capacity (current balance plus capital revenue) to slightly exceed 100% in 2016 before dropping to 80% on average in 2017-2019, leading to debt increase over the medium term. Debt (Neutral/Stable) Puy de Dome's long-term debt levels are close to the French departments' at EUR356.2m, representing 56.6% of operating revenue at end-2015. According to our base case scenario, the department's long-term debt should stabilise or slightly decrease in 2016 before progressively increasing to above EUR400m over the medium term (around 65% of current revenue). This increase, combined with the expected deterioration in fiscal performance, should lead to a slight weakening of the department's debt sustainability. We expect Puy de Dome's direct risk (including short-term debt and fire protection brigades' debt) payback ratio to be around six years at-end 2016 (2015: 5.6 years) and to progressively increase towards eight years over the medium term. Debt service coverage should deteriorate, but remain comfortable, with debt service (capital and interest) representing around 70% of operating balance over the medium term (2015: 42.6%). Puy de Dome's ratings also reflect the following key rating drivers: Economy (Strength/Stable) Puy-de-Dome's socio-economic indicators are slightly better than the national average. The department has a structurally lower unemployment rate (8.5% in 2Q16 vs. 9.6% in Metropolitan France) and the poverty rate is also below the Metropolitan average (12.6% vs. 14.5% in 2013). Puy de Dome's spending relative to social benefit is slightly below the average of French departments, but remains high (16.4% of current expenditure in 2015). Management (Strength/Stable) Puy de Dome benefits from sound and proactive governance, underpinned by sophisticated debt and liquidity management and prudent forecasts. The department has been able to implement stringent cost-cutting measures in 2016, including on social spending and staffing. Fitch believes it will be able to achieve its spending objectives in the coming years. Institutional Framework (Neutral/Stable) The solvency of French sub-nationals is underpinned by the quality of their financial and administrative framework, which makes debt servicing one of their highest spending priorities. French departments' fiscal autonomy is higher than regions', but lower than municipalities', as their rate-setting power is limited to the property tax (19% of their current revenue in 2015; 24.4% in Puy de Dome). On the expenditure side, departments show less flexibility than other French LRGs as their main compulsory responsibility is the implementation of social welfare measures passed by parliament. RATING SENSITIVITIES An upgrade could be triggered by an improvement in fiscal performance, leading to a direct risk-to-current balance ratio below six years on a sustained basis. A deterioration of the direct risk-to-current balance ratio above 12 years on a sustained basis could lead to a downgrade. KEY ASSUMPTIONS In this review, we assumed that the department would still manage transportation responsibilities in the coming years and receive compensation from region Auvergne-Rhone-Alpes for them. 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 Christophe Parisot Managing Director +33 1 44 29 91 34 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 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=1016265 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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