OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed the French Department of Essonne's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA-' and its Short-term foreign currency IDR at 'F1+'. The Outlook is Stable.

Essonne's EUR1bn euro medium-term programme has also been affirmed at 'AA-' and 'F1+'. Its EUR160m commercial paper programme has been affirmed at 'F1+'.

KEY RATING DRIVERS

The ratings are underpinned by Essonne's track record of sound operating performance, debt restraint, strong governance and a diversified economy. 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 its ratings.

The operating margin is expected to decline to around 8% of operating revenue in 2017, from an estimated 12.1% at end-2014. The deterioration in performance is mainly due to announced sharp cuts to state transfers (of 6% on average between 2015 and 2017), while operating spending is expected to continue to grow, though at a slower pace (1.5% between 2015 and 2017 compared with 2.1% between 2012 and 2014) as cost-cutting measures continue to be implemented.

The department has a slightly flexible budget structure. About 70% of operating revenue is based on non-modifiable taxes and state transfers, and operating expenditure is driven by rigid items such as state-defined social spending, mandatory transfers and staff costs. Possible shrinkage in departmental current transfers would provide some, albeit limited, operating spending flexibility, allowing Essonne to concentrate on its core competencies.

The department's current balance covered, on average, 67.6% of capital expenditure between 2010 and 2014. We expect that this level of coverage will 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 EUR180m per year between 2015 and 2017, from EUR199m per year between 2012 and 2014.

Direct debt remained moderate at 80% of current revenue at end-2014, but is expected to increase to around 100% in 2017, mainly due to capital expenditure and to a slight decrease in current revenue. Debt coverage metrics remained comfortable, with a debt payback ratio of around 7.5 years at end-2014 and strong debt service coverage. Even if the debt payback ratio could increase to around 15 years in 2017, we believe that the department is able to maintain, with the implementation of corrective measures, debt metrics compatible with its current ratings.

Guaranteed debt totalled an estimated EUR190m 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. However, Fitch will monitor financial guarantees the department may grant to the Rugby Federation for the potential building of a new stadium, and its impact on the department's budgetary profile.

Benefiting from the size and strength of Greater Paris, Essonne's economy is diversified and dynamic. This has provided Essonne with a favourable socioeconomic profile and one of the lowest unemployment rates in France (7.5% at end-3Q14). Consequently, the department's gross social expenditure per capita is below the metropolitan average. Nonetheless, Fitch expects this level of social expenditure to slightly increase over the medium term.

RATING SENSITIVITIES

A downgrade could result from the department's inability to control its operating expenditure, with an operating margin sustainably below 5%.

A debt payback ratio at previous levels and a restoration of an operating margin consistently in the range of 10 % could lead to an upgrade.