OREANDA-NEWS. November 30, 2015.  Fitch Ratings has affirmed the French Region of Picardy's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+', and Short-term foreign currency IDR at 'F1'. The Outlook is Stable. Picardy's French commercial paper (Billets de Tresorerie) short-term programme has been affirmed at 'F1'.

The affirmation reflects Picardy's sound budgetary performance, as well as the region's weak socio-economic profile in the French context and limited revenue flexibility. The affirmation also factors in the upcoming merger of Picardy with the region Nord-Pas-de-Calais as of 1 January 2016.

The Stable Outlook reflects our opinion that Picardy, and then Nord-Pas-de-Calais-Picardy (NPDCP), have the ability to maintain budgetary performance and debt metrics in line with the ratings, despite growing budgetary pressure stemming from negative revenue trends over the medium term.

KEY RATING DRIVERS
From 2016, Picardy will merge with Nord-Pas-de-Calais region. According to our preliminary consolidated analysis based on publicly available data, we project that, despite a likely slightly heavier debt burden, the new region is likely to post a sound financial profile compatible with the ratings and maintain adequate debt service coverage.

According to our new, consolidated baseline scenario, NPDCP should maintain a sound current margin over the medium term, in a range of 12%-14% until 2017. However, the new region's budgetary performance will also depend on the decisions and policies made by its executive body, to be elected in December 2015. Also, the progressive convergence of tax rates (mainly on car registration fees), spending (such as wage policies) and policies may have a significant impact on revenue and spending, although it is not decided how it will be implemented yet. In the longer term, economies of scale and some possible transfers of competencies from departments may have an impact on NPDCP's budgetary performance. Therefore, Fitch will regularly reassess the future entity's financial profile and amend its consolidated scenario accordingly.

Our scenario factors in a slight decline in operating revenue until 2017, due to cuts in state transfers. Given the growth of rigid spending items such as mandatory transfers (train service and professional trainings) and payroll, we believe NPDCP may not be able to fully offset the expected decline in operating revenue.

At end-2014, Picardy's direct debt was EUR594m (including short-term debt) or 83% of current revenue and 6.2 years of current balance. Debt service was more than 2x covered by the operating margin. In our consolidated base case scenario, we expect the debt payback ratio of NPDCP to weaken to 10-12 years over the medium term.

Liquidity is underpinned by predictable cash flows and diverse committed and revolving lines and a recurrent recourse to a EUR60m short-term programme. Fitch considers NPDC will have sufficient refinancing sources to meet liquidity needs after the merger.

Picardy and Nord-Pas-de-Calais have a lower-than-national average socio-economic profile. The population's wealth is below the national average and GDP per capita was about 77% and 81% of the national average of EUR32,084 in 2013, respectively. The share of population without qualifications (20.1% of adults without degree at end-2012 for NPDCP as a whole) is above the national average (17.9%), reflecting a higher-than-average need for professional training. The unemployment rate was 12.4% at end-2Q15 for NPDCP, above the national rate of 10%. The merger will lead to an enlarged economic base, with a similar, weaker-than-national average profile.

RATING SENSITIVITIES
A stabilisation of operating performance, with a current margin at or above 15% for several consecutive years, leading to healthy debt coverage ratios (debt payback ratio below eight years) could result in an upgrade.

Higher-than-expected operating and capital expenditure or a sharper decline in operating revenue, leading to a current margin below 8%, and deterioration in the debt payback ratio to 15 years could result in a downgrade.

KEY ASSUMPTIONS
We currently expect the envisaged merger will have a neutral impact on Picardy's ratings. Once the merger has taken place and more accurate data is available, we will reassess the impact.