OREANDA-NEWS. Fitch Affirms French City of Rennes at 'AA'; Outlook Stable Fitch Ratings has affirmed the French City of Rennes' Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with Stable Outlooks and Short-term foreign currency IDR at 'F1+'. Fitch has also affirmed Rennes' EUR200m EMTN programme at 'AA'/'F1+'.

The affirmation reflects Rennes' sound operating performance, moderate indebtedness, strong governance and robust economy. The Stable Outlook reflects Fitch's view that despite expected weakening of performance over the medium term, the city will be able to maintain financial metrics compatible with the ratings.

KEY RATING DRIVERS

According to our base case scenario, Rennes' operating margin may weaken towards 10% in 2019 from a sound 14% in 2015 (excluding non-recurring items). We estimate that operating revenue growth will be below 0.5% a year on average in 2015-2019 as the cuts in state transfers in 2016 and 2017 are likely to offset the growth in tax revenue.

We expect operating expenditure to grow 1.6% a year on average in 2015-2019, considering the relative rigidity of operating spending (such as staff costs). However, the recent announcement made by the French President that cuts in state transfers relative to municipalities and their groupings would be reduced by half in 2017 should help Rennes outperform these projections and stabilise the operating margin at around 11%. Fitch also estimates that there is some budgetary flexibility from Rennes' direct tax leeway. However, the city has committed not to use it.

Capital expenditure declined to EUR51.4m in 2015 from EUR92m in 2014 as Rennes transferred a number of its investment responsibilities (such as road maintenance) to its inter-municipal grouping, the Metropolis of Rennes (RM; AA/Stable/F1+), as of 1 January 2015, in application of the French "Metropolis" law. We expect capital expenditure to remain stable at around EUR50m-EUR55m a year in the coming years. Consequently, despite the expected weaker operating balance, the self-financing capacity of capital expenditure (before debt repayment) should remain sound at around 85% on average in 2016-2019, compared with 92% in 2012-2014.

Debt is moderate at EUR156.6m at end-2015, or 52.5% of current revenue. We expect it to slightly increase but remain adequate in the coming years, at around 65% of current revenue in 2019. Through the expected decline in the current balance, the debt payback ratio may weaken towards eight years in 2019, from a sound 4.2 years in 2015 (excluding non-recurring items). However, we estimate that it will remain below our guideline for negative action of eight years and that recent announcements made by the French President should help Rennes keep the ratio at a maximum of seven years. We also expect debt service coverage to remain sound, below 60% of operating balance in the coming years.

Rennes benefits from a stable political framework and sound governance, with good control over operating spending and a high level of integration with RM. Rennes' ability to implement its medium-term financial strategy is underpinned by its skilled administration and prudent financial management.

Rennes enjoys a dynamic and well-diversified economy and benefits from the dynamism of its urban area. The service sectors are strong and the industrial is solid, despite a challenging industrial restructuring. Economic growth prospects are underpinned by a young, highly qualified population, moderate real-estate prices and outstanding public infrastructure.

RATING SENSITIVITIES

An upgrade could be triggered by a sustained improvement of the debt payback ratio to below four years, provided the sovereign's rating is also upgraded.

A consistently weak operating margin, together with a debt payback ratio increasing to eight years, could result in negative rating action. A downgrade of the sovereign would also be reflected by Rennes' ratings.