July 16, 2012 / 11:34 AM / in 5 years

TEXT-S&P afrms French Region of Champagne-Ardenne rtg; otlk stable

(The following statement was released by the rating agency)

July 16 -


-- We believe that Champagne-Ardenne’s continued tight monitoring of its operating expenditure will partly offset very sluggish operating revenues.

-- We consider that the region will continue to reduce its deficits after capital accounts.

-- We are affirming our ‘AA-/A-1+’ long- and short-term ratings on Champagne-Ardenne.

-- The stable outlook reflects our belief that the region’s debt burden will remain moderate until 2014.

Rating Action

On July 16, 2012, Standard & Poor’s Ratings Services affirmed its ‘AA-/A-1+’ long- and short-term issuer credit ratings on France’s Region of Champagne-Ardenne. The outlook is stable.

At the same time, we affirmed Champagne-Ardenne’s ‘A-1+’ short term issue rating on its EUR80 million French commercial paper (CP) program.


The ratings on Champagne-Ardenne reflect our view of the “predictable and well-balanced” institutional framework for French regions, the region’s good budgetary performance, and its very limited contingent liabilities.

The ratings are constrained by what we consider as the region’s limited revenue flexibility and our expectation that Champagne-Ardenne will post very poor operating revenue growth until 2014.

We view the region’s financial management as “neutral” for the ratings. We view positively the region’s strong commitment to financial discipline and its prudent and diversified debt and liquidity management. However, we consider that the quality of its capital expenditure monitoring and long-term planning could improve.

In 2011, owing to its disciplined approach to operating expenditure (up only 1.5% versus 2.3% the previous year excluding an exceptional one-off item related to the regional railway contract), the region was able to maintain a good operating margin of 16% of operating revenue (against 18% in 2010), fully in line with our base-case scenario. Thanks to exceptional capital revenues, the region’s deficit after capital accounts remained moderate in 2011, at 2% of total revenues (close to the 1.6% in our base-case scenario), despite higher-than-expected capital expenditure.

In our base-case scenario for 2012-2014, we think the region will contain the gradual decrease of its operating balance to 13%-14% of operating revenues by 2014 through its continued tight rein over operating expenditure. We anticipate a stabilization of its operating revenues (excluding cyclical European funds) until 2014. Champagne-Ardenne will continue to be affected by the central government decision to freeze transfers to French local and regional governments and by sluggish tax revenues. Still, we anticipate that the region will maintain its grip on operating expenditure, with low 1.3% growth per year on average excluding interest charges. We anticipate this growth despite the likely 3% cost increase per year from 2012 linked to the region’s railway contract.

In our base case, we anticipate that Champagne-Ardenne will reduce its deficits after capital accounts to an average low of about 0.8% of total revenues during 2012-2014, after a 2.3% average during 2009-2011. Our scenario incorporates a gradual reduction of capital expenditures to EUR124 million annually on average in 2012-2014 (following EUR136 million per year on average in 2009-2011). Consequently, Champagne-Ardenne’s high operating balance by international standards and its exceptional capital revenue for infrastructure projects of EUR16.8 million annually should enable it to self-finance more than 90% of its capital expenditure (budget loans granted excluded).

In our view, the slight deficits after capital accounts would allow Champagne-Ardenne to almost stabilize its tax-supported debt until 2014. In our base-case scenario, tax-supported debt would reach 109% of operating revenues and less than 8x the operating balance by 2014, compared with 107% in 2010, and 7x the operating balance in 2011.

We consider Champagne-Ardenne’s restricted revenue flexibility to be the main ratings constraint. Modifiable revenues are limited to the tax on car registrations, or 8% of operating revenues. Therefore, we believe budgetary flexibility now hinges on expenditure, especially capital expenditure, which represents 26% of total expenditure.


We view Champagne-Ardenne’s liquidity position as “neutral” under our criteria. We consider that the region has satisfactory access to external liquidity and benefits from predictable and regular cash flows, especially state transfers and tax proceeds.

As of June 30, 2012, Champagne-Ardenne’s liquidity benefits from EUR60 million in committed bank lines and EUR48.5 million in contracted bank loans. We consider that the average amount available on these liquidity facilities and available bank loans will cover debt service (including EUR25 million in outstanding commercial paper {CP}) over the next 12 months at between 80% and 120%. Moreover, the region has already issued a EUR25 million bond which covers more than 70% of its long-term funding needs for 2012. Given the EUR48.5 million in available bank loans, the region has already fully secured its funding needs for the current year.

We also believe that at any time the amount available under the committed bank lines will cover 100% of Champagne-Ardenne’s CP outstanding.


The stable outlook reflects our view of Champagne-Ardenne’s ability to gradually reduce its deficits after capital accounts to a very low 0.3% of total revenues in 2014, versus 2% in 2011, thanks to its disciplined approach to expenditure. We believe that the region will maintain its tax-supported debt below 110% of operating revenues and 8x the operating balance by 2014.

In our upside scenario, a stronger rein on operating expenditures and slightly more dynamic revenues would allow Champagne-Ardenne to maintain its operating balance at a high 17% of operating revenues by 2014. In addition, if the region invests at a lower annual rate of EUR118 million, against the EUR124 million we anticipate in our base case, we think it would be able to post surpluses after capital accounts of about 2.5% on average in 2012-2014 and reduce its tax-supported debt to 97% of operating revenues by 2014 and less than 6x the operating balance.

Such a good performance could prompt a positive rating action on Champagne-Ardenne, based on our view of its likely strengthened financial management.

Conversely, we could consider a negative rating action if Champagne-Ardenne’s discipline allows for high expenditures that lead to a structurally decreasing operating margin to 10% of operating revenues by 2014. Moreover, in this downside scenario, an increase in capital expenditure would lead to a widening deficit after capital accounts, reaching 5% of total expenditure by 2013, and an increase of the region’s tax-supported debt to above 120% by 2014.

However, both our upside and downside scenarios are unlikely at this stage.

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

-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local and Region Governments and Related Entities And For Their Commercial Paper Programs, Oct. 15, 2009

Ratings List

Ratings Affirmed

Champagne-Ardenne (Region of)

Issuer Credit Rating AA-/Stable/A-1+

Senior Unsecured AA-

Commercial Paper A-1+

Our Standards:The Thomson Reuters Trust Principles.
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