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+'.

KEY RATING DRIVERS
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. The ratings reflect the city's sound operating performance, tax flexibility, moderate, albeit rising, debt and Paris's position as the political and economic capital of France (AA/Stable/F1+).

Fitch expects high capital expenditure and pressure on operating revenue (through cuts in state transfers) will continue to have a negative impact on Paris's debt metrics. We forecast direct risk payback may reach 9.1 years at end-2016 compared with an average of 7.1 years over 2011-2015. Fitch expects debt to total about EUR5bn by end-2016 and eventually edge to EUR6bn by end-2018/2019. This increase is mitigated by Paris's strong access to capital markets (through its EUR4bn EMTN programme) and revenue flexibility. Liquidity is strong due to reliable and well-diversified funding, predictable cash flows and prudent debt management.

Paris has announced it will curb operating spending through a series of structural spending cuts, which will be implemented over the medium term. In our base case, we estimate that the operating margin could reach about 12% in 2019 compared with 10.4 % in average over 2011-2015. From 2017, Paris will be affected by the transfer of some of its competencies to Metropole du Grand Paris (MGP), together with transfers of a share of Paris's taxes (compensated at an equivalent amount by current transfer received from MGP). Taking them into account in its forecast, Fitch judges that these transfers will not have a material impact on the budget profile of the city.

Despite heavy investments of EUR1.7bn on average per year until 2019, Fitch estimates Paris will maintain a self-financing capacity (SFC; current balance plus capital revenue) at 85.1% of capital expenditure in 2019. We expect SFC to be supported by capital revenue, notably from average asset sales of EUR200m per year, and by a mildly improving current balance. Paris's large portfolio of disposable assets is a key credit strength as it could help limit debt financing.

Fitch views that Paris has substantial tax leeway due to fairly low tax pressure compared with other French major cities although the city has ruled out using its tax rate flexibility. Fiscal flexibility is underpinned by strong tax base growth, supported by the local economy. Such revenue flexibility mitigates the impact of transfer cuts and the rigidity of many operating spending items (staff, social spending).

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

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

Paris is both a municipality and a department, with broad responsibilities ranging from education to culture, roads, urban planning, public utilities and housing. It also the main member of the MGP- created in 2016 - which is an inter-municipal body in charge of housing policy and urban planning over 131 municipalities of the greater Paris area. Fitch expects this will be financially neutral for Paris.

On an international basis, Fitch views Paris's economy as strong. The city is France's main political, administrative and economic centre. It benefits from a large, well-qualified workforce and high-quality infrastructure. Paris tends to mirror national trends, but its resilient economy helped contain unemployment at 8% in 4Q15, below the national average of 10%.

RATING SENSITIVITIES
A debt payback ratio consistently above 10 years, combined with a further deterioration of budgetary performance, would result in a negative rating action.

A revision to Stable Outlook may result from improved budgetary performance with an operating margin consistently above 10%, combined with a debt payback ratio around eight years.