OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed the French Department of Bouches du Rhone'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. Its EUR500m senior unsecured bonds have been affirmed at 'AA'.

Bouches du Rhone's ratings are underpinned by its track record of sound operating performance, low indebtedness and strong governance. Despite expected moderate weakening of its operating performance, Fitch is confident in the department's ability and willingness to maintain a sound financial profile and contain debt, as reflected in its Stable Outlook.

KEY RATING DRIVERS

Debt is low, at 23% of current revenue at end-2014, and is expected to rise to 57% of current revenue in 2017. Debt coverage metrics remains comfortable, with a sound debt payback ratio of 1.8 years at end-2014 compared with an average maturity of eight years and 11 months, and strong debt service coverage.

The department aims to keep the debt payback ratio below seven years through 2017 and to achieve a minimum current balance of EUR150m. However, we estimate that the debt payback ratio could reach a maximum of nine years on weaker operating performance, putting the ratings under pressure. However, we believe the capacity of the department to achieve its medium-term financial objectives is underpinned by its track record of reliable financial forecasting.

We project the operating margin will decline to 8.1% in 2017, from a still comfortable 13.3% estimated at end-2014. The expected deterioration in performance is mainly due to sharp cuts in state transfers, while operating spending - particularly in social spending - is expected to continue to grow, albeit more slowly (2% in 2014-2017, from 3.3% over 2010-2014) due to the implementation of some cost-cutting measures.

Fitch expects investments to slightly increase to an average EUR518m per year over 2015-2017 (EUR491.5m at end-2014). Combined with expected weaker operating performance, Fitch forecasts that the department's capacity to self-finance investments (with current balance plus capital revenue) to decline to an average 52% per year (70% at end-2014). Fitch believes that the department will have the flexibility to smooth its investments in order to maintain a budgetary profile that is compatible with ratings.

Operating revenues are mostly based on non-modifiable taxes and state transfers, and operating expenditures are 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 Bouches du Rhone to concentrate on its core competencies

The department has a weaker-than-average socio-economic profile. In 1Q14, the unemployment rate (11.8%) was fairly stable but higher than the national average (10.4%), which implies higher social expenditure than other departments.

RATING SENSITIVITIES
A downgrade could result from Bouches du Rhone's inability to control its operating expenditure and to adjust its capital expenditure to its self-financing capacity, which could weaken the debt payback ratio towards 10 years.

A positive rating action could result from a strengthening of the operating margin towards 20% and an improvement in the socio-economic profile.