OREANDA-NEWS. April 28, 2015. Fitch Ratings has revised the French Department of Val d'Oise's Outlook to Negative from Stable and affirmed the Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA-' and the Short-term foreign currency IDR at 'F1+'.

The department's EUR1bn euro medium-term programme and its EUR100m commercial paper
programme have been affirmed at 'AA-' and 'F1+'.

KEY RATING DRIVERS

The Outlook revision reflects Fitch's expectation that the department's budgetary performance and debt metrics will weaken in the medium term. This is due to continuous cuts in state transfers which, combined with steadily growing social spending, are likely to contribute to a deterioration in the department's financial profile. This is despite Val d'Oise's control over spending, strong governance and commitment to maintaining sound fiscal performance and debt metrics over the medium term.

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

HIGH
According to preliminary results, the current margin weakened to 5.6% in 2014, from 8% in 2013. This is due to lower-than expected revenue (up 2.1%), mainly from sluggish property transfer duties, and higher spending (up 5%) driven by dynamic social spending and contributions to the national equalisation fund. If no tax hike is implemented, Fitch estimates flat revenue growth until 2018, as growing tax proceeds will be offset by the drop in transfers (down 6.3% a year from 2014 to 2018) while social transfers grow steadily (up 3.6%).

The department aims to generate up to EUR75m of savings by 2016, via additional cost-cutting measures and a scaling down of non-mandatory spending. Should the latter not be achievable through spending reduction alone, Fitch considers Val d'Oise may tap its remaining tax leeway, as the housing tax rate is moderate compared with peers. This would limit the decline in its current margin to around 6% in the medium term, but it would still not be compatible with the current ratings.

Debt is high compared with peers and is likely to reach 107% of current revenue in 2018, from 103% in 2014, assuming average capital expenditure of EUR130m a year. The debt-to-current balance ratio may weaken to an average of 19 years in 2015-2018, from an average of 14 years in 2011-2014. Debt service coverage is weak, equivalent to 124% of current revenues in 2014.

The Department of Val d'Oise ratings also reflect the following key rating drivers:

Sound management: Val d'Oise's ability to implement its saving plan is underpinned by the department's skilled administration. Management is prudent and has a clear budgetary strategy. Cash flows are predictable, and prudently managed. Short-term funding is adequate and relies on the regular use of a EUR100m Billets de Tresorerie programme, fully backed by committed credit and revolving lines.

Strong socio-economic profile: Val d'Oise benefits from its location within the Ile-de-France Region (AA/Stable/F1+), one of Europe's wealthiest regions. Its economic prospects are supported by dynamic industries and large land reserves in the greater Paris urban area.

Low-risk indirect risk: Val d'Oise's high level of debt guarantees (EUR542m at end-2014) are mostly related to social housing institutions (88% of total), which are strictly monitored and regulated by the state. Fitch considers Val d'Oise's main public sector entities to be of low risk (fire services and social housing institutions).

RATING SENSITIVITIES

A weakening of the current margin to below 7% over three consecutive years and a debt/current balance ratio consistently above 15 years could lead to a downgrade.