OREANDA-NEWS. April 21, 2015. Fitch Ratings has revised the Eurometropole of Strasbourg's Outlook to Negative from Stable and affirmed the department's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' and its Short-term foreign currency IDR at 'F1+'.

Its EUR300m euro medium-term programme has also been affirmed at 'AA'.

KEY RATING DRIVERS

The Outlook revision reflects Fitch's expectation that Eurometropole's debt metrics and budgetary performance will weaken in the medium term. This is due to an expected increase in debt, driven by capital expenditure, and cuts in state transfers that will result in a deterioration of the financial profile. Positively, the ratings are underpinned by strong management that keeps a tight control over spending and by a robust socio-economic profile.

The Outlook revision reflects the following rating drivers and their relative weights:

HIGH

We expect an increase in direct debt, mainly driven by capital expenditure, which peaked at EUR279m in 2014. We consequently forecast the debt payback ratio to rise to about 15 years in 2017, from an estimated 6.6 years at end-2014. Eurometropole has expressed its commitment to reducing capital expenditure but, over the short term, this is constrained by the timing of financed projects, making unlikely a reduction sufficient to maintain the current debt metrics.

Indirect debt mainly relates to CTS (Compagnie des Transports Strasbourgeois) and is likely to slightly increase over the medium term. The level of public-sector entity debt guaranteed by Eurometropole is high, which we estimate to have reached around 380% of operating revenue at end-2014. However, the guarantees present limited economic risk, as they are mostly concentrated in the strongly state-supported social housing sector and in CTS, which we expect to have posted a balanced net result at end-2014.

MEDIUM

Fitch forecasts that the operating balance will decline over the medium term, to around 17% of operating revenue in 2017, from an expected 24% at end-2014. This is due to the impact of state transfers cuts, which will lead to a revenue decline.

Fitch does not expect Eurometropole will be able to fully counterbalance the cuts in state transfers (8.5% per year on average between 2014 and 2017) with operating spending restraint. Despite upcoming cost-cutting measures, Eurometropole's budget shows limited flexibility with around 75% of operating expenditure being driven by rigid items such as staff costs and mandatory transfers. Nonetheless, Eurometropole still benefits from direct tax leeway.

Eurometropole's ratings also reflect the following rating drivers:

Located in Alsace on France's German border, Eurometropole derives some benefits from Germany's dynamic economy. Strasbourg's key economic role is underpinned by its status as the seat of several European institutions, including the European Parliament. Under the territorial reform, Strasbourg would become the capital of the new region resulting from the merger of the regions of Alsace, Lorraine and Champagne Ardennes. In Fitch's view these features contribute to the resilience of the local economy.

Eurometropole also benefits from a stable political framework with a cross-party consensus on key issues, especially financial strategy.

In January 2015, Eurometropole was accorded the metropolitan legal status. This entails enlarged competencies in a wide range of policies. Fitch does not believe this has changed its budgetary profile as many of metropolitan functions were performed by the Urban Community of Strasbourg (CUS, former name of Eurometropole).

RATING SENSITIVITIES

A deterioration of the debt payback ratio, driven by an increase in the absolute level of debt and weaker operating performance, to consistently above 10 years could result in a downgrade.