OREANDA-NEWS. December 15, 2015. Fitch Ratings has assigned the French Public Hospitals' Joint Bond Issue CHU de France Finance a Long-term local currency expected senior unsecured rating of 'A+(EXP)'.

This is the fourth issue of a pool of French public hospitals and the second rated by Fitch. The EUR100m bullet bond will have a maturity of 10 years and will finance hospitals' investments. The bond represents an unsecured and unsubordinated obligation of each obligor. Each hospital's share of the total bond issue ranges from 4% to 24%.

The final rating is contingent upon the receipt of final document conforming to information already received.

KEY RATING DRIVERS
The obligors jointly participate in the issue with no solidarity mechanism. In the absence of cross-repayment obligations, credit enhancement or liquidity reserves, the bond would be in default if any of the joint issuers failed on its obligations. Fitch considers a joint bond issue that does not provide mutual support or solidarity mechanisms among the different obligors, or collateral backing as dependent on the weakest participant. Consequently, Fitch assesses the issue based on the credit quality of the weakest participant.

Fitch applied its public sector entity criteria with a top-down approach to assess each obligor (French public health establishments; PHE) as they are classified as credit-linked entities: Regional and University Hospital (CHU) of Rennes, CHU of Bordeaux; Regional Hospital Centre of Metz-Thionville, Hospices Civils of Lyon (HCL), CHU of Angers, CHU of Montpellier, CHU of Nimes and Hopitaux Universitaires de Strasbourg.

Each member of the pool has mandated a health care cooperation group, GCS CHU de France Finance, to represent it and to act for it. This entity is a public law body whose objectives are to represent its membership before financial partner, and an operational support to the joint bond issues. Fitch does not consider the participation of the obligors to this health care cooperation to mean there is any financial solidarity between the members.

The French government does not explicitly guarantee their respective debt. However, by virtue of their PHE status, Fitch assumes that the state would have the willingness to provide timely support in case of need. PHEs' assets and liabilities cannot be liquidated or transferred to entities other than the French state.

Due to PHEs' integration in the general government accounts and the state's role in financing (through decisions on tariff-setting and general grants), Fitch considers that the obligors integration is strong. At end-2014, obligors' revenue from their sponsor represented an average of about 77% of total operating revenue. Moreover, the state monitors regional health policies and exercises budgetary and financial control over the hospitals through the Regional Health Agency (ARS; state agency).

Borrowings are subject to approval by the state if the PHE does not comply with certain budgetary ratios. At end-2014, four obligors were subject to this approval. Each obligor's liquidity is also underpinned by the tight state control through regional committees and potential extraordinary transfers from the state in case of need. Some of the obligors (CHU of Bordeaux, HCL and CHU of Montpellier) are allowed by law to issue a French commercial paper programme. In view of the safeguards, Fitch considers that a rating differential of three notches from the sponsor (France; AA/Stable/F1+) acts as a rating floor for French PHEs.

Due to their status as regional hospitals, obligors have a strategic role in the provision of health care service in their regional territory. Fitch believes this means that if they were in financial distress, they would benefit from stronger and more immediate state support than other hospitals.

In the medium term, Fitch expects obligors to improve their budgetary profiles thanks to the implementation of efficiency efforts, and an increase in revenue related to the overall activity of the hospital. However, Fitch estimate that the weight of staff costs on total expenditures and the civil servant status of most staff members, are a constraint in terms of flexibility. At end-2014, with about 15,000 beds, obligors' budgetary performances were relatively homogenous and stable with an average gross margin of 6.7 % (2013: 6.8 %).

The obligors' total long-term debt represented 36 % of consolidated revenue at end-2014, although the percentage by hospital ranged from 12.4% to 66.1%. Given ARS financial aids, each obligor's self-financing capacity was sufficient to cover capital debt repayment. In the medium term, the state's aim is to control hospitals' budgetary performances and follow investments through the inter-ministerial committee for performance and modernisation.

RATING SENSITIVITIES
A downgrade would most likely follow a downgrade of the sovereign rating as Fitch considers the joint bond's rating to be linked to France's IDR. A dilution of the PHE legal status, control from the sponsor or weakening financial support from the state could also trigger negative rating action.

An upgrade would most likely result from a reinforcement of commitments from the sponsor or a sovereign upgrade.