OREANDA-NEWS. December 23, 2015. Fitch Ratings has affirmed the 16 French Public Hospitals' joint bond issue's Long-term local currency rating at 'A+'.

The bond was the third issue of a pool of French public hospitals and the first rated by Fitch. The EUR228m bond matures on 14 February 2023 and financed hospitals' investments. The bond represents an unsecured and unsubordinated obligation of each obligor. Each hospital's share of the total bond issue ranges from 2% to 15%.

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 obligors (French public health establishments; PHE) as there are classified as a credit-linked entities: Assistance Publique Hopitaux of Marseille, Hospices Civils of Lyon, Regional and University Hospital (CHU) of Toulouse, CHU of Montpellier, CHU of Dijon, CHU of Bordeaux, CHU of Clermont-Ferrand, Regional Hospital Centre of Metz-Thionville, CHU of Nancy, CHU of Nice, CHU of Nimes, CHU of Poitiers, CHU of Rouen, CHU of Grenoble, CHU of Saint Etienne and CHU of Besancon.

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. PHE assets and liabilities cannot be liquidated or transferred to entities other than the French state.

Due to PHE integration in the general government accounts and the state's role in financing (through decisions on tariff-setting and general grants), Fitch considers that obligor's integration is strong. At end-2014, obligors' revenue from their sponsor represented an average of about 76% 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, 11 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. In addition, some of the obligors (CHU of Bordeaux, HCL and CHU of Montpellier) are allowed by law to issue a French commercial paper programme.

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 cost on total expenditures and the civil servant status of most staff members, are a constraint on flexibility. At end-2014, with about 28,000 beds, obligors' budgetary performances were relatively homogenous and stable with an average gross margin at 7.0 %.

The obligors' total long-term debt represented 46% of consolidated revenue at end-2014, although the percentage by hospital ranged from 4.0% to 81.2%. 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 the Issuer Default Rating of the French Republic. A dilution of the PHE legal status, control from the sponsor or a 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.