OREANDA-NEWS. June 10, 2015. Fitch Ratings has affirmed the City of Rennes' 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. Fitch Ratings has also affirmed Rennes' EUR200m EMTN programme at 'AA' and Short-term rating at 'F1+'.

Rennes' ratings are underpinned by its sound operating performance, moderate indebtedness, strong governance and robust economy. The Stable Outlook reflects Fitch's view that despite expected weakening over the medium term, the city will be able and willing to keep financial metrics compatible with the ratings.

In application of the French "Metropolis" law, the city of Rennes transferred different competencies (such as road maintenance) to the Metropolis of Rennes (RM), as of 1 January 2015. This will lead to lower operating spending and revenue, as well as a reduction in capital expenditure for the city. This change of scope will be offset by a recalculation of the operating transfers between the city and RM, as provided by law.

KEY RATING DRIVERS
Despite pressure on operating revenue due to significant cuts in state transfers, Fitch considers that Rennes will continue to report a sound fiscal performance over the medium term. Fitch assumes that Rennes will curb operating spending through implementing a series of reforms, including a full review of its public policies to scale-back non-mandatory expenditure. Due to the relative rigidity of spending, these measures will only impact the city's operating performance over the medium term. Moreover, even if they fully materialise, they may be insufficient to offset the declining allocations from the state in the next three years (-8.9% on average between 2014 and 2017) resulting in a decline in the operating margin to around 10.5% of operating revenue in 2018, from an estimated 15.5% in 2014. Our forecasts do not factor in possible tax hikes as the city has committed not to implement these over the medium term.

Capital expenditure is projected at EUR92m in 2014, focusing on roads, infrastructure and education but is expected to decline towards EUR47m per year from 2015 to 2017. This is mainly due to the transfer of competencies that occurred in January 2015 as the reduction in capital expenditure would have been of 17% at the same scope.

Total debt, including other Fitch classified debt such as that of ancillary budgets, to current balance could weaken to a maximum of seven years in 2017, from a low 5.1 years at end-2014, according to our base case scenario. This decline is mainly due to the deterioration of the current balance as debt should be quite stable over the medium term. Debt guarantees are decreasing but were a still high EUR152m at end-2014. Nonetheless, they are mostly for the benefit of social housing entities, which Fitch views as a highly regulated and low-risk sector.

Rennes benefits from a stable political framework and sound governance, with a high level of integration with its inter-municipal grouping, RM (AA/Stable/F1+). Rennes' ability to implement its medium-term financial strategy is underpinned by its skilled administration and prudent financial management.

Rennes' economy remains dynamic, well diversified, and has below-average unemployment rate (8.2% at 4Q14 against 10.4% at the national level), despite challenging industrial reshaping. Economic growth prospects are underpinned by a young, highly qualified population, low real-estate prices and outstanding public infrastructure.

RATING SENSITIVITIES
A consistently weak operating margin together with a total debt to current balance ratio increasing to over eight years could result in negative rating action.

An upgrade could be triggered by a stable operating margin and a durable decrease of the total debt to current balance ratio to below four years.

KEY ASSUMPTIONS
Our base case scenario relies on the assumption that the transfer of competencies between the city and RM will impact the absolute values of the 2015-2018 accounts but not significantly affect the range of the financial metrics.