OREANDA-NEWS. June 09, 2015. Fitch Ratings has affirmed the French region of Picardy's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+', and Short-term IDR at 'F1'. The Outlook is Stable.

The affirmation reflects Picardy's sound budgetary performance, as well as the region's weak socio-economic profile and limited revenue flexibility. The Stable Outlooks reflects our opinion that Picardy has the ability to maintain budgetary performance and debt metrics in line with the ratings, despite growing budgetary pressure stemming from negative revenue trends in the medium term.

KEY RATING DRIVERS
From 2016, Picardy will merge with Nord Pas de Calais region and the new region will have broader responsibilities. From our preliminary consolidated analysis based on publicly available data, we understand that despite a likely weaker debt profile, the new region is likely to post a sound financial profile compatible with the ratings.

The new region may achieve economies of scale but this will take time. In the short term, the new regional government that will be elected in December 2015 will have to review most of its political commitments. Fitch will monitor developments and factor them into its forecasts. At this stage, given the lack of clarity around these future political commitments, Fitch has based its forecasts on a constant perimeter.

According to preliminary results, the current margin dropped more than expected in 2014 to 13.4% of current revenue (Fitch classifies TICPE Grenelle tax as a capital revenue), from 17.2% in 2013 as spending grew rapidly while revenue slightly decreased.
According to our base case scenario, the current margin could decrease further, toward 10% in 2017. This would result from declining operating revenue, driven by state transfer cuts (-3% a year on average from 2014 to 2017). Our base case scenario assumes a slight decline in operating expenditure growth, at -0.6% per year on average (from a similar average decline in 2010-2014), although the potential but not yet confirmed implementation of spending control measures could make spending drop more rapidly.

Picardy's management aims to implement a series of structural spending cuts to curb operating spending over the medium term. In our opinion, given the growth of the most rigid spending items such as mandatory transfers (train service and professional trainings) and payroll, the region may not be able to fully offset the expected decline in operating revenue.

According to our base case scenario, Picardy's debt will increase to about 109% of current revenue in 2017, from 78% in 2014. The debt payback ratio will weaken to about 11 years in 2017, from 5.9 years in 2014. This will result from a deterioration in the rate of capital expenditure self-financing as Picardy would not be able to scale down capital spending fast enough to adjust to the expected decline in self-financing capacity.

The region's short-term liquidity needs are covered by several revolving credit lines (totalling EUR68.2m at end-2014), two committed bank lines totalling EUR40m and a EUR60m commercial paper programme. Picardy's contingent liabilities are low. Guaranteed debt totalled EUR0.2m at end-2014.

Picardy has a lower than average socio-economic profile. The population's wealth is below the national average and GDP per capita was about 76% of the national average of EUR31,076 in 2012. The share of people with professional qualifications is below the national average, entailing above-average needs for professional training. The unemployment rate was 11.7% at 4Q14, above the national rate of 10%.

RATING SENSITIVITIES
A stabilisation of the operating performance, with a current margin at or above 15% for several consecutive years, leading to healthy debt coverage ratios (debt payback ratio below eight years) could lead to an upgrade.

Higher than expected operating and capital expenditure or a sharper decline in operating revenue, leading to a current margin below 8%, and deterioration in the debt payback ratio to 15 years could result in a downgrade.