OREANDA-NEWS. Fitch Ratings has affirmed the French Department of Val d'Oise's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA-' with Negative Outlooks, and its Short-term foreign currency IDR at 'F1+'.

The department's EUR1bn euro medium-term programme and its EUR100m commercial paper
programme have been affirmed at 'AA-' and 'F1+'.

KEY RATING DRIVERS
The ratings reflect Val d'Oise's sound but weakening operating performance, solid economy and strong governance, as well as high debt levels. The Negative Outlook reflects Fitch's expectation that the department's budgetary performance and debt metrics will weaken over the medium term, to levels which may not be compatible with the current ratings.

According to our central scenario, the current margin is likely to remain below 7% over the medium term, after having weakened to 5.6% in 2014 from 8% in 2013. This is due to continuous cuts in state transfers which, combined with steadily growing social spending, are likely to contribute to deterioration in the department's financial profile. This is despite the adminstration's control over spending and commitment to maintaining sound fiscal performance and debt metrics over the medium term.

The department aims to generate up to EUR75m of savings by 2016, via additional cost-cutting measures and a scaling down of non-mandatory spending. Should the latter not be achievable through spending reduction alone, and assuming a constant scope of responsibilities, Fitch believes Val d'Oise may tap its remaining tax leeway, as the housing tax rate is low compared with peers. This would limit the decline in its current margin to around 6% over the medium term, albeit still not compatible with the current ratings.

Debt is likely to remain high compared with peers over the medium term. Our base case scenario forecasts debt to average 104% of current revenue until 2018 (2014: 103%), assuming average capital expenditure of EUR130m a year. With the weaker current margin, the debt-to-current balance ratio may weaken to an average of 18 years in 2015-2018, from an average of 14 years in 2011-2014. Debt service coverage weakened to 124% of operating balance in 2014 from 99% in 2013, and is not expected to improve over the medium term.

Val d'Oise's ability to implement its saving plan is underpinned by the department's skilled administration. Management is prudent and has a clear budgetary strategy. Cash flows are predictable, and prudently managed. Short-term funding is adequate and relies on the regular use of a EUR100m billets de tresorerie programme, fully backed by committed credit and revolving lines.

Val d'Oise benefits from its location within the Ile-de-France Region (AA/Stable/F1+), one of Europe's wealthiest regions. Its economic prospects are supported by dynamic industries and large land reserves in the greater Paris urban area.

Val d'Oise's high level of debt guarantees (EUR542m at end-2014) are mostly related to social housing institutions (88% of total), which are strictly monitored and regulated by the state. Fitch considers Val d'Oise's main public sector entities (fire services and social housing institutions) to be of low risk.

RATING SENSITIVITIES
A weakening of the current margin to below 7% over three consecutive years and/or a debt/current balance of consistently above 15 years could lead to a downgrade.