OREANDA-NEWS. Fitch Ratings has affirmed the City of Paris's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with a Negative Outlook and Short-term foreign currency IDR at 'F1+'.

Fitch has also affirmed Paris's EUR4bn euro medium-term notes programme and its senior unsecured notes at 'AA'/'F1+'. Paris's EUR800m commercial paper programme has also been affirmed at 'F1+'.

The ratings reflect the city's sound operating performance, tax flexibility, moderate albeit rising debt and the city's position as the capital of France (AA/Stable/F1+). The Negative Outlook reflects our expectations that the city's debt ratios may rise to levels that may not be compatible with the current ratings.

KEY RATING DRIVERS

Fitch considers that the combined effect of high capital expenditure and pressure on operating revenue (through cuts in state transfers) will continue to have a negative impact on debt metrics. At end-2015, we forecast debt payback will reach 9.4 years compared with 6.9 years at end-2014. However, this is, to a small extent, mitigated by Paris's strong access to capital markets (through its large EUR4bn EMTN programme) and its revenue flexibility. The city's operating balance will remain sound, covering interest payment by about 4.5x. Liquidity is strong due to reliable and well-diversified funding, predictable cash flows and prudent debt management.

The combined effect of a series of structural spending cuts and the recent vote of some rate increases, mainly related to property transfers duty and parking fees, would slightly offset lower state transfers (down 12.2% over 2014-2018). We estimate that the operating margin will remain sound at 10% in 2018, up from an expected 8.7% at end-2015.

Assuming an annual capital expenditure of EUR1.6bn during 2016-2018, Fitch expects a stabilisation of Paris's self-funding capacity (SFC; current balance plus capital revenue) to a sound average of 84.5% in 2016-2018, compared with an average of 81.3% over 2010-2014. Capital revenue should be underpinned by assets sales averaging EUR200m per year, although this will be insufficient to prevent an increase in direct debt in nominal value to EUR5.7bn in 2018, compared with EUR4.4bn at end-2015.

Paris retains tax leeway due to fairly low tax pressure compared with other major French cities. Tax flexibility is underpinned by strong tax base growth supported by the local economy. Paris aims to optimise taxation related to the use of its public properties.

Debt guaranteed by Paris is high, but mostly relates to low-risk long-term loans taken on by state-monitored social housing entities. Paris's numerous dependent entities are tightly supervised and mostly self-supporting.

Fitch considers Paris's financial management highly efficient, particularly in terms of its forecasting ability, which allows the city to control its annual budget and debt commitments. Debt and liquidity management is conservative.

Paris is France's main political, administrative and economic centre. The city benefits from a large, well-qualified workforce and high-quality infrastructure. Paris tends to mirror national trends, but its resilient economy has helped contain unemployment structurally below the national average.