OREANDA-NEWS. Fitch Ratings has published University Hospital of Strasbourg's (HUS) Long-Term Local Currency Issuer Default Rating (IDR) at 'AA' and assigned Long - and Short-Term Foreign Currency IDRs of 'AA' and 'F1+', respectively. The Outlook is Stable.

Fitch rates HUS on a top-down basis under its public-sector entity rating criteria, due to its status as a public hospital establishment (PHE), its tight control by the French State (AA/Stable/F1+) and its strategic importance to the government. As a result, the ratings of HUS are credit-linked to, and equalised with, those of France.

KEY RATING DRIVERS

As a PHE, Fitch expects HUS to benefit from very strong state support in case of need. The French government does not explicitly guarantee HUS's debt, but Fitch assumes that the State would have the willingness to provide timely support in case of need. By virtue of its status, the assets and liabilities of HUS cannot be liquidated or transferred to entities other than the French State. Moreover, as a PHE, the debt of HUS is included in social security debt, which is accounted as general government debt under the Maastricht Treaty.

HUS's Director is appointed by a presidential decree. HUS is subject to a plan to return to a balanced budget (PRE) over 2014-2020, implying tight annual monitoring by a regional health agency (ARS) while new borrowings are subject to approval by ARS. Fitch believes that the State's strong financial supervision through ARS of HUS's multi-year funding and revenue and expenditure helps keep the budget in check.

HUS performs an essential public service through its provision of healthcare services, medical teaching and research, and represents 33% of the supply of hospital care in a 50km radius of its geographical area, while its private clinics represent another 8%. HUS's revenues are highly dependent on the State's decisions on tariff-setting and on general grants to finance HUS's public health responsibilities.

Fitch expects HUS to achieve its gross margin target (without subsidies) of 8.9% in 2019 (compared with 4.3% expected at end-2016) while returning to a balanced main budget, following efficiency measures. At end-2016, Fitch expects HUS's gross self-financing capacity (SFC; EUR22.8m) to be sufficient to cover debt repayment (EUR20.9m). This will represent an improvement on 2015, when a significant debt burden resulted in HUS's financial metrics being in line only with 'BBB' rated peers.

HUS will face significant investment needs of EUR187m over 2016-2018, compared with EUR40.9m at end-2015, which will mostly be self-funded, due to an expected improvement in budgetary performance and asset disposals. HUS's debt repayment should represent 40% of estimated cash flow from operations (CFO) in 2019. HUS's long-term debt is estimated at EUR425m in 2019, down from an expected EUR454m at end-2016.

As with other PHEs, HUS's liquidity is tightly controlled and monitored monthly by the State through regional committees. For July 2016, day-to-day liquidity shortfalls are covered by liquidity lines totalling EUR22m that are available until November 2016.

RATING SENSITIVITIES

A downgrade of HUS could result from a significant weakening of budgetary and financial support from the State, or adverse changes to its liquidity back-stop provided by the French State. An adverse change to HUS's status could also result in a downgrade, although Fitch considers such a change unlikely at present. Rating action on the French sovereign would also lead to a corresponding action on HUS.