OREANDA-NEWS. July 07, 2015. Fitch Ratings has revised the City of Paris' Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' and Short-term foreign currency IDR at 'F1+'.

Fitch has also affirmed Paris' EUR4bn euro medium-term programme at 'AA'/'F1+' and its EUR800m commercial paper (billets de tresorerie; BT) programme at 'F1+'.

KEY RATING DRIVERS
The Negative Outlook reflects our expectations that the city's debt ratios will weaken over the next three years to levels that are not compatible with the current ratings. The ratings reflect the city's sound although declining operating performance, tax flexibility, moderate albeit rising debt and its position as the capital of France (AA/Stable/F1+).

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

HIGH

Fitch estimates the city's debt payback ratio will reach the negative rating trigger of 12.5 years in 2018 from forecasted 9.7 years at end-2015. We also forecast the operating margin will cover interest paid by 3.7x compared with an expected 4.3x at end-2015. Fitch considers that Paris' strong access to capital markets (through its EUR4bn EMTN programme) and its revenue flexibility would slightly mitigate this negative factor. Liquidity is strong due to reliable and well-diversified funding, predictable cash flows and prudent debt management.

According to Fitch's base case scenario, the city's operating balance will decline steadily in the medium term to 8.7% of operating revenue in 2018, from 9.8% at end-2014. This would be a result of lower state transfers (down 16.8% over 2014-2018), combined with a greater contribution to several equalisation funds (up 2.3%). A series of structural spending cuts, however, should result in operating spending declining slightly (down 0.5%), though not enough to offset flat revenue.

The assumed decline of the current balance and high annual capital expenditure of about EUR1.6bn during 2015-2018 may weaken Paris' self-funding capacity (SFC; current balance plus capital revenue) to an average 73% in 2015-2018 compared with average 81.3% over 2010-2014. This may be mitigated by additional capital revenue stemming from assets sales averaging EUR200m per year, albeit not sufficient to prevent an increase of debt of between 8.5% and 10.6% in 2015-2018.

MEDIUM

Although Paris rules out using its tax flexibility, Fitch considers that it retains tax leeway due to fairly low tax pressure compared with other French major cities. Fiscal flexibility is underpinned by strong tax base growth supported by the local economy. Paris aims to optimise taxation related to the use of its public properties. Such revenue flexibility mitigates the impact of transfer cuts and many rigid operating spending items (staff, social spending).

Paris' ratings also reflect the following key rating driver:

Debt guaranteed by Paris is high, at 131% of current revenue, but mostly relates to low-risk long-term loans taken on by state-monitored social housing entities. Paris' numerous dependent entities are tightly supervised and mostly self-supporting.

Fitch considers Paris' financial management highly efficient, particularly in terms of its forecasting ability, which allows the city to control its annual budget and debt commitments. Debt and liquidity management is conservative.

Paris is France's main political, administrative and economic centre. The city benefits from a large, well-qualified workforce and high-quality infrastructure. Although Paris tends to mirror national trends, its resilient economy has helped contain unemployment at 8.3% in 4Q14, below the national average of 10%.

RATING SENSITIVITIES
A debt payback ratio consistently above 10 years combined with a further deterioration of budgetary performance would result in a negative rating action.