OREANDA-NEWS. March 10, 2015. Fitch Ratings has affirmed the Department of La Manche's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA-' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable.

KEY RATING DRIVERS

La Manche's ratings are underpinned by its track record of sound operating performance, moderate indebtedness and strong governance. The Stable Outlook reflects Fitch's view that, despite expected weakening over the medium term, the department would be able and willing to keep financial metrics compatible with the ratings.

We expect the operating margin to have remained stable in 2014, at an estimated sound 14.9% of operating revenue. The expected deterioration in the performance is mainly due to sharp cuts in state transfers, while operating spending is expected to continue to grow, albeit at a slower pace (1.2% on average between 2014 and 2017 against 1.7% in 2014) as cost-cutting measures are being implemented. Over the medium term, management's aim is to achieve a minimum operating balance of EUR60m, compared with EUR71.7m estimated at end-2014.

The department has a slightly flexible budget structure. About 75% of operating revenue is based on non-modifiable taxes and state transfers, and operating expenditure is driven by rigid items such as staff costs, mandatory transfers and state-defined social spending. Possible shrinkage in departmental current transfers would provide some, albeit limited, operating spending flexibility, allowing La Manche to concentrate on its core competencies.

The department's current balance covered, on average, 72.5% of capital expenditure between 2010 and 2014. We expect self-financing to decline due to a lower current balance going forward. However, this should be limited by a gradual scaling-down of capital expenditure, to an average of EUR76m per year between 2015 and 2018, from EUR84m per year between 2011 and 2014.

Direct debt was moderate at 67% of current revenue at end-2014, and is expected to stay around 70% of current revenue to 2017. Debt coverage metrics remained comfortable, with a sound debt payback ratio of around 5.4 years at end-2014 and strong debt service coverage. Fitch estimates that, in accordance with the department's aim, the debt payback ratio would reach a maximum of seven years at end-2017, which would, nevertheless, remain compatible with its ratings. Although guaranteed debt is high in absolute terms (EUR272m at end-2014), Fitch considers risk related to the guaranteed debt as low since the guarantees are mostly to low-risk regulated social housing entities.

While the structure of the local economy is less sensitive to national economic fluctuations than that of other departments, particularly because of a high number of retirees, it does not generate high added-value. The population's wealth is below the national average, while the wealth of the elderly population is slightly above. In 3Q14, the unemployment rate (8.5%) was lower than the national average (9.9%). This should result in below-average social spending for the department.

RATING SENSITIVITIES

A downgrade could result from La Manche's inability to control its operating expenditure and to adjust its capital expenditure to its self-financing capacity, which could result in a debt payback ratio above 10 years.

An improvement of the current margin for several consecutive years, leading to sound debt coverage ratios, combined with controlled capital expenditure, could lead to an upgrade.