OREANDA-NEWS. April 29, 2015. Fitch Ratings has revised the French Region of Bretagne's Outlook to Negative from Stable and affirmed its Long-term local and foreign currency Issuer Default Ratings (IDRs) at 'AA' and Short-term foreign currency IDR at 'F1+'.

Its EUR500m senior unsecured bonds have been affirmed at 'AA'/'F1+'.

KEY RATING DRIVERS
Bretagne's ratings reflect its sound operating performance and its favourable socio- economic profile. The ratings also take into account the expected increase in debt due to sizeable capital expenditure until 2017. The Negative Outlook reflects Fitch's view that debt metrics may not be compatible with the ratings with direct debt at about 150% of current revenue in 2017.

The rating actions reflect the following key rating drivers and their respective weights:

HIGH
According to our base-case scenario, Bretagne's debt could increase to about 147.1% of current revenue by 2017, from 67.5% at end-2014. Due to a deterioration of the capital expenditure self-financing rate, the debt payback ratio will weaken to a maximum of nine years in 2017 (2014: 2.9 years) a level that is incompatible with the ratings. However, the region aims to reduce its level of investment from 2017 to the same level as before 2014.

Capital expenditure will remain high at about EUR500m per year between 2015 and 2017, from EUR405.5m per year since 2010. The region co-finances the regional high-speed railway system and purchases train rolling stock, while maintaining a capital programme in other areas. Combined with a weaker current margin, this high level of capital expenditure will result in a lower investment self-financing rate of 48.8% in 2017 from an average 87.9% since 2010.

MEDIUM
Fitch expects the operating margin to weaken to 18.7% in 2017 (2014: 23.6 %). This will be due to a combination of declining revenue (with cuts expected in state transfers) and limited flexibility of operating expenditure thanks to the implementation of spending control measures. As financial charges will rise in accordance with growing debt, the current margin is expected to weaken to 16.6% from 23.2% at end-2014.

Bretagne's ratings also reflect the following key rating drivers:

Fitch considers the region's financial management to be highly efficient, notably in terms of its forecasting ability, which should allow Bretagne to control its annual budgetary performance and debt commitments.

The region's liquidity is underpinned by predictable cash flows. Short-term liquidity needs are covered by several revolving credit lines (EUR187.5m at end-2014) and three committed bank lines totalling EUR60m. In the short term, Bretagne's liquidity management policy could also include the issuance of French commercial paper.

Bretagne's diversified economy relies on an important agricultural and food processing sector, and on a strong industrial base. Its unemployment rate (8.8 % at 3Q14) is structurally below the national average (9.9%), due to a skilled workforce. We expect the regional economy to recover in line with the French economy.

RATING SENSITIVITIES
An inability to adjust expenditure to match revenues, leading to an increase in debt-to-revenue to consistently above 120%, could lead to negative rating action.