OREANDA-NEWS. October 13, 2015.  Fitch Ratings has affirmed the Eurometropole of Strasbourg's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' and Short-term foreign currency IDR at 'F1+'. The Outlook is Negative.

For commercial purpose, at the issuer's request, the rating of the EUR300m euro medium-term note programme has been withdrawn, as the issuer no longer has recourse to the programme. The EUR65m bonds issue (ISIN: FR0011528868) has been affirmed at 'AA'.

The affirmation is based on the Eurometropole's sound operating performance, moderate indebtedness and strong governance. The Negative Outlook reflects Fitch's view that debt metrics and budgetary performance will weaken in the medium term, resulting in a deterioration of the financial profile that could put the current ratings under pressure.

KEY RATING DRIVERS
Fitch forecasts that the operating balance will decline over the medium term, to around 18.6% of operating revenue in 2018, from 24% at end-2014. This is mostly due to the impact of sharp cuts in state transfers (8.5% per year on average between 2014 and 2017), voted for by the French Parliament. This will lead to a decline in revenue that is not fully compensated by operating spending restraint, although operating spending is expected to grow at a slower pace as cost-cutting measures are implemented.

We expect debt to reach a high 184% of current revenue by 2018, despite Fitch's forecast, based on the issuer's commitment, to a gradual scaling-down of capital expenditure to an average of about EUR180m per year in 2015-2018 (from EUR210m in 2011-2014). The debt payback ratio could rise to about 11 years, from 6.6 years at end-2014, mainly due to the deterioration of the current balance.

Direct debt increased to 137% of current revenue at end-2014, from 61.2% in 2011. This was due to a rise in capital expenditure (+43% between 2011 and 2014), while the covering ratio of capital expenditure by the current balance decreased to 30% in 2014 from 50% in 2011.

Indirect debt mainly relates to Compagnie des Transports Strasbourgeois (CTS) and is likely to slightly increase over the medium term. The level of public-sector entity debt guaranteed by the Eurometropole is high, at 380% of operating revenue at end-2014. However, the guarantees present limited economic risk as they are mostly concentrated in the strongly state-supported social housing sector and in CTS, which posted a balanced net result at end-2014.

The Eurometropole benefits from strong governance, evidenced by accurate budget planning and debt management. However, despite planned cost-cutting measures, the Eurometropole's budget has limited flexibility, with around 75% of operating expenditure being driven by rigid items such as staff costs and mandatory transfers. Nonetheless, there is some budgetary flexibility stemming from the Eurometropole's direct tax leeway, although this option is currently not being contemplated.

Eurometropole also benefits from a stable political framework with a cross-party consensus on key issues, especially financial strategy.

Located in Alsace on France's German border, Eurometropole derives some benefits from Germany's dynamic economy. Strasbourg's key economic role is underpinned by its status as the seat of several European institutions, including the European Parliament. As of January 2016, Strasbourg will become the capital of the new region resulting from the merger of the regions of Alsace, Lorraine and Champagne Ardennes. In Fitch's view, these features contribute to the resilience of the local economy.

RATING SENSITIVITIES
A deterioration of the debt payback ratio, driven by an increase in the absolute level of debt and weaker operating performance, to consistently above 10 years could result in a downgrade.