OREANDA-NEWS. July 13, 2015 Fitch Ratings has revised the Department of Savoie's Outlook to Negative from Stable and affirmed the department's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' and Short-term foreign currency IDR at 'F1+'.

The Outlook revision reflects Fitch's expectation that the department's budgetary performance and debt metrics will weaken in the medium term. This is mainly due to cuts in state transfers that will not be fully compensated by operating spending restraint, despite strong management, and will thus result in a deterioration of the financial profile as well as a decline in the debt payback metrics.

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

HIGH
Fitch forecasts that the operating balance will decline over the medium term, to around 11.5% of operating revenue in 2017, from a high 18.2% at end-2014. This is mostly due to the impact of a cut in state transfers (12.5% per year on average between 2014 and 2017), voted by the French Parliament in the 2015 finance bill. This will lead to a decline in revenue not fully compensated by operating spending restraint, although operating spending is expected to grow at a slower pace (1.1% over 2015-2018 against 2.1% in 2010-2014) as cost-cutting measures are implemented.

Despite the strong management and cost-cutting measures, Savoie's budget has limited flexibility, with around 85% of operating expenditure driven by rigid items such as staff costs and mandatory transfers. However, there is some budgetary flexibility stemming from the department's direct tax leeway, although this option is currently not being contemplated.

We expect the debt payback ratio to rise to about eight years in 2017, from a comfortable 3.4 years at end-2014. This is mainly due to the deterioration of the current balance, as Fitch forecasts, in accordance with the issuer's commitment, a gradual scaling-down of capital expenditure to an average of about EUR90m per year between 2015 and 2018 (against EUR108m on average per year over 2011-2014).

Savoie benefits from significant real estate assets in ski resorts as well as financial assets, which could be used over the medium term to improve the debt metrics. These disposals of assets are not yet sufficiently probable to be factored in our projections. Nonetheless, if this was confirmed, it could lead to a higher self-financing of investment ratio as well as lower indebtedness over the medium term.

MEDIUM
Savoie's socio-economic indicators are better than the national average, with notably lower unemployment (8.1% at end 2014 against 10.1% at the national level) and slightly higher average wealth. It benefits from a dynamic tourism industry, driven by some of Europe's leading ski resorts.
Savoie's ratings also reflect the following rating drivers:

The department benefits from a stable political framework with a clear political majority and a cross-party consensus on key issues (especially financial strategy).

Debt guarantees were high at EUR491m (101.3% of current revenue) at end-2014. However, they are mostly for low-risk and regulated social housing entities. Dependent public-sector entities are fully self-funded and well capitalised.

RATING SENSITIVITIES
A weak operating performance leading to a debt payback ratio above 8 years could result in a downgrade.

Although Fitch considers it unlikely, an upgrade could result in case of a sovereign upgrade, from a sustained improvement in the operating performance leading to considerably stronger debt metrics, for instance a debt payback ratio durably below four years.