French Region of Franche-Comte #AA/A-1+# Ratings Affirmed On Strong Management And Debt Outlook Stable

Stocks and Financial Services Press Releases Friday May 16, 2014 16:46
Franche--16 May--Standard & Poor's
On May 16, 2014, Standard & Poor's Ratings Services affirmed its 'AA/A-1+'long- and short-term issuer credit ratings on France's Region ofFranche-Comte. The outlook is stable.

The ratings on Franche-Comte reflect our view of the "predictable andwell-balanced" institutional framework for French regions, and Franche-Comte's"positive" financial management, "positive" liquidity, and very limitedcontingent liabilities. We also factor into the ratings the region's quitefavorable socioeconomic profile by international standards and a debt burdenthat we expect to remain moderate, although increasing.

The ratings are constrained by what we view as the region's restricted taxflexibility, declining operating revenues, and our estimates for largerdeficits after capital accounts from 2015 onward.

We view Franche-Comte's financial management as positive, thanks to its strongpolitical willingness to maintain strong budgetary performance, good budgetmonitoring, and prudent and sophisticated debt and liquidity management.Thanks to the quality of Franche-Comte's financial management, its currentdebt burden is moderate by national and international standards, even afterthe funding of the first phase of the eastern branch of the high-speedRhine-Rhône railway line. Despite a less favorable national financial andeconomic context, we consider that the region will stick to its main debttarget of direct debt not exceeding 5x its annual operating balance.

In an institutional framework for French regions with an overall good revenueand expenditure balance, Franche-Comte showed its ability to post a strongoperating balance above 22% of operating revenues and surpluses after capitalaccounts on average during 2011-2013. In 2014, we think Franche-Comte willmaintain a strong budgetary performance with an operating balance close to 21%of operating revenues and a very moderate deficit after capital accounts ofless than 1% of total revenues.

Nevertheless, from 2015, the region will face increasing budgetary pressurestemming from the €11 billion reduction in state transfers to French local andregional governments (LRGs) over 2015-2017. In our base-case scenario, weestimate that Franche-Comte will lose about €7 million per year in governmenttransfers during 2015-2017. However, thanks to a stronger rein over operatingexpenditures, even with an annual growth below 1%, we believe the region willcontain the gradual decline of its operating balance to 16.4% of operatingrevenues in 2016.

We continue to incorporate in our base-case scenario Franche-Comte'sstill-high incurred capital expenditures, at €140 million annually in 2015 and2016. Consequently, due to the gradual decrease of the operating balance andthe reduction of capital revenues, we expect deficits after capital accounts

to be structurally above 5% of total revenues from 2015.

After stabilizing in 2014 at 45% of operating revenues, we expect that thetax-supported debt will increase to reach a still moderate 61% of operatingrevenues in 2016, in line with our previous forecast, despite state transfercuts. In addition, we continue to expect that the region will post a very good

debt-to-operating balance ratio of 3.7x in 2016, below its target of 5x. AsFranche-Comte's tax-supported debt already incorporates guarantees granted tosectors other than social housing and some other specific financialcommitments, the remaining amount of guarantees is negligible (0.2% ofoperating revenues at year-end 2013) and contributes to our assessment of theregion's contingent liabilities as very limited.

In our view, Franche-Comte could tap its budgetary flexibility to meet itsbudgetary targets, although we see this flexibility as only moderate.Modifiable revenues are limited to the tax on car registrations, or less than9% of operating revenues. We therefore believe the region's budgetaryflexibility mainly hinges on capital expenditures (about 29% of totalexpenditures), especially its ability to postpone them.

Franche-Comte is located in eastern France and has roughly 1.2 millioninhabitants. Its socioeconomic indicators are quite high by internationalstandards (GDP per capita of €24,295 in 2012) but below the national average.The regional economy is characterized by the importance of industry,especially automotive, which leads to tax concentration. Nevertheless, weconsider that the risk related to this concentration is moderate, owing to therestricted weight of corporate taxes in the regional budget--13% of operatingrevenues--and limited effects on expenditures.


We view Franche-Comte's liquidity as positive under our criteria. We considerthat it has a positive debt coverage ratio and "satisfactory" access toexternal liquidity. In our view, the region has predictable and regular cashflows, especially state transfers and tax proceeds.

Franche-Comte's liquidity benefits from €25 million available in liquiditylines and an approximate €11 million revolving line for 2014. We consider thatthe average amount of cash and the average amount available under thesefacilities will cover debt service of about €20 million by more than 120% over

the next 12 months.

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