OREANDA-NEWS. Fitch Ratings has assigned the region of Centre-Val-de-Loire 'AA' Long-term foreign and local currency IDRs with Stable Outlook and a 'F1+' Short-term foreign currency IDR.

Fitch has also assigned an expected 'F1+(EXP)' rating to Centre-Val-de-Loire's EUR160m French commercial paper (Billet de Tresorerie) programme. The final rating is contingent upon the receipt of final documentation conforming to information already received.

The ratings reflect the region of Centre-Val-de-Loire's track record of strong budgetary performance, low debt, and prudent management and a favourable socio economic profile. The ratings also reflect the risk of weaker budgetary performance over the medium term, due to cuts in state transfers.

KEY RATING DRIVERS
The ratings action reflects the following key rating drivers and their respective weights:

High
The ratings are underpinned by the region's track record of strong and stable budgetary performance, with an operating margin of around 26% in 2011-2015. According to our base case scenario, operating margin should remain sound over the medium term, although it will erode to 19% in 2019, from 24% in 2015, due to falling state transfers not being fully compensated by a growing tax base. Centre Val-de-Loire's flexibility on operating revenue is limited to less than 10% of total expenditure.

Centre-Val-de-Loire's management aims to mitigate the declining state transfers through greater spending restraint and a trade-off between different budget spending items. Centre- Val-de-Loire's ability to control operating expenditure is supported by flexibility on discretionary spending. This could at least partially offset the growth of spending in non-flexible items (train services, training).

We expect Centre-Val-de-Loire's capital expenditure to remain significant in 2016-2019, at EUR334m a year on average (including passed-through EU funds), considering the region's commitment to maintain constant capital outlay as outlined in the 2015-2021 mandate. This, together with expected declines in current margin, should lead to a weaker self-financing capacity (SFC), which we forecast would average 56% (after debt repayment) over the medium term, down from a strong 83% in 2011-2015. However, we believe Centre-Val-de-Loire would be able to reduce capital expenditure (around 30% of total spending) should its budget surplus shrink more rapidly than expected.

Centre-Val-de-Loire's direct debt is low compared with other French regions, at 81% of current revenue in 2015. Including finance leases, we expect Centre-Val-de-Loire's direct risk to grow in the medium term, with the consolidation in 2016 of new lease contract (estimated at EUR161.4m) and the expected decline in the SFC to 136% of current revenue or 8.1 years of current balance, from 89% and four years in 2015. Debt service coverage by operating balance is expected to remain sound, at 48% on average until 2019, up from 32% in 2015.

Medium
Despite its small size compared with other French regions (especially after 2016 mergers), Centre-Val-de-Loire's socio-economic profile is balanced due to resilient local industry (cosmetics and pharmaceuticals) and important agricultural and tourism sectors. Socio-economic indicators are in line with national average (GDP per capita at 97% of national average outside Ile-de-France) albeit with slightly weaker poverty indicators and unemployment rate (9.9% at end-3Q15, against 10.2% for France).

Centre-Val-de-Loire's ratings also reflect the following key rating drivers:

The region's liquidity is underpinned by predictable cash flows and regular use of a EUR160m Billets de Tresorerie programme. Additionally, the programme has a back-up facility of committed bank lines capped at EUR160m, providing a financial safeguard.

RATING SENSITIVITIES
The ratings are not constrained by the sovereign's ratings (France, AA/Stable/F1+). A positive rating action may result from an upgrade of the sovereign rating, provided that operating margin remains in line with the last five-year average, debt payback is below five years and direct debt-to-current revenue remains below 70%.

Sharper-than-expected deterioration in Centre-Val de Loire's budgetary performance, leading to worsening of debt ratios (e.g., debt payback of about eight years on a sustained basis), could lead to a downgrade.