French Region of Bourgogne-Franche-Comte 'AA/A-1+' Ratings Affirmed; Outlook Stable


  • We think the region of Bourgogne-Franche-Comte (BFC) benefits from a supportive institutional and economic context.
  • Although we expect temporary larger deficits related to the region's train renewal program, strong financial management should help BFC achieve its main budgetary targets and maintain a moderate debt burden and sound liquidity position in 2019-2021.
  • We are affirming our 'AA/A-1+' long- and short-term ratings on BFC.
  • The outlook is stable.
RATING ACTION
On March 15, 2019, S&P Global Ratings affirmed its 'AA' long-term and 'A-1+' 
short-term issuer credit ratings on the French region of 
Bourgogne-France-Comte (BFC). The outlook is stable.

At the same time, we affirmed our 'A-1+' short-term issue rating on its €100 
million French commercial paper (NEU CP) program.

OUTLOOK
The stable outlook reflects our base-case expectation that BFC will maintain a 
moderate debt burden and a sound liquidity position while significantly 
increasing capital expenditure (capex) over the next two years. 

Downside scenario
If we lowered our ratings on France (AA/Stable/A-1+; unsolicited) or revised 
the outlook to negative, we would take a similar action on BFC. Moreover, we 
might also consider a negative rating action if the region's budgetary 
performance deteriorated further, or if its liquidity position structurally 
weakened. Therefore, we will pay particular attention to the region's work 
toward refining its long-term capital planning and reducing deficits from 
2022-2023.

Upside scenario
We might consider a positive rating action if we took a similar action on 
France and if the region's financial management--in particular tighter control 
over spending--resulted in a significantly stronger budgetary performance and 
a debt burden structurally below 60% of operating revenues, or a 
direct-debt-to-operating balance below 3x.

RATIONALE
Our ratings on BFC primarily reflect our belief that the region's financial 
management will allow it to step-up investments over 2019-2021, while 
achieving its main budgetary and debt targets and maintaining a sound 
liquidity position. We also think the region will continue to benefit from a 
supportive framework and a solid economy.

After posting surpluses and small deficits during 2015-2018, we expect 
deficits will significantly increase from 2019 due to the train renewal 
program, but that the debt burden will remain contained
In the coming years, we expect pressure on BFC's budgetary performance 
stemming from the central government's apprenticeship reform and vocational 
training plan will be limited, but the step-up of investments will lead to 
significantly higher deficits. 

The vocational training plan will be implemented by most regions, including 
BFC, over 2019-2022, with an initiation phase in 2018. This will translate 
into €252 million of additional spending on vocational training for BFC during 
this period. Although the program will be entirely central-government funded, 
there will be a delay between spending and receiving the corresponding 
revenues from the state, resulting in a temporary operating balance reduction. 
However, total revenues will match the region's expenses, having a neutral 
impact over the medium term. 

The apprenticeship reform, however, might induce a net revenue loss for BFC. 
Regions will no longer be responsible for apprenticeship schemes from 2020, 
except for some residual expenses, and will thus lose the related dedicated 
revenues. In the case of BFC, we believe the budgetary impact will be either 
neutral or negative, depending on whether or not regions can retain a share of 
a state transfer that used to fund vocational training in addition to 
apprenticeships. 

We expect BFC's operating balance will decrease over 2019-2021 to 16% of 
operating revenues on average under our base case, compared with an average of 
19% in 2017-2018. At constant scope, that is without the vocational training 
plan effect, the operating balance should remain above BFC's target of 17% of 
operating revenues (17.6% on average over 2019-2021 in our base case), thanks 
to its strong control over operating expenditures and somewhat dynamic fiscal 
revenues, in line with our expectations in March 2018. We expect total 
operating revenues will increase by 0.9% per year on average in 2019-2021. 

Notwithstanding a strong operating performance, we expect increasing pressure 
in the capital section. Given BFC's plan to extensively renew its trains we 
expect capex will average €483 million during 2019-2021, at 31.7% of total 
expenditures on average and significantly higher than the €321 million on 
average observed over 2015-2018. We forecast deficits after capital accounts 
will average 9.1% of total revenues in 2019-2021 (8.9% if we exclude the 
effect of the vocational training plan), resulting in a weaker budgetary 
performance compared with our former base case scenario. However, we believe 
this budgetary trend is temporary. After posting high surpluses of 3.4% and 
4.2% in 2015 and 2016 respectively, and only moderate deficits of 2% of total 
revenues on average over 2017-2018, the region is now engaging in a large 
capex program related to the renewal of some of the regional trains. 
Consequently, we expect capex will decrease from 2022-2023, once the train 
renewal program is complete. Deficits would then significantly reduce. 
Furthermore, we believe BFC would use its leeway on other capex and delay some 
of its investments, should its performance significantly deviate from its 
objectives. The region's flexibility, which we assess as average, mainly 
hinges on capex, with modifiable revenues accounting for less than 10% of 
operating revenues.

This trend should result in increasing debt intakes, but we expect the debt 
burden will remain moderate, with tax-supported debt expected at 83% of 
operating revenues at end-2021. In addition, we believe interest rates will 
remain low, in line with past trends, at about 1% of operating revenues.

Although the region's average amount of cash is decreasing, debt service 
coverage should remain strong thanks to the proactive liquidity management. 
The region has liquidity lines totaling €110 million, revolving loans 
amounting to €11 million, and €38 million available in multi-year loans 
contracted with the European Investment Bank. We believe the average 
availabilities on these liquidity sources and multi-year loans--excluding the 
amount we expect will be used to fund capex--and our estimate of the region's 
average cash over the next 12 months, will cover more than 120% of its debt 
service (including an average outstanding amount of commercial papers 
estimated at about €40 million). 

Furthermore, we consider that the region has satisfactory access to external 
liquidity, as shown by regularly contracted liquidity facilities with a 
diversified pool of domestic banks. In order to diversify its sources of 
liquidity, the region has implemented a NEU CP program and started to issue 
under it, benefiting from negative interest rates. Moreover, French regions 
generally enjoy predictable and regular cash flows, especially in the form of 
central government transfers and tax proceeds, as part of their predictable 
institutional framework.

The institutional framework, financial management, and socioeconomic 
indicators remain key credit strengths
We consider that French regions have a favorable institutional framework. 
Therefore, recent central-government reforms, in particular the apprenticeship 
reform and the vocational training plan, should not have a significant impact 
on regions' credit standing. In addition, the institutional framework enables 
a good revenue and expenditure balance overall. Since 2018, French regions 
have received a share of the national value-added tax (VAT; amounting to €4.2 
billion in 2018, or 15% of regions' operating revenues) instead of the main 
central government grant ("Dotation globale de fonctionnement" [DGF]). VAT 
proceeds have been quite dynamic over past years, and we expect they will 
increase by more than 2% per year, while the DGF decreased by €21 million per 
year over 2015-2017 for BFC, or 2% of its annual operating revenues. 

In addition, the central government set a target of €13 billion savings by 
2022 for French local and regional governments. This will be achieved by 
limiting their operating expenditure increases--in contrast with the current 
trend--at an annual ceiling of 1.2% in 2018-2020. These changes could boost 
regions' operating balances. We believe BFC, which demonstrated operating 
expenditures growth below the 1.2% target in 2018, will maintain tight budget 
controls in order to comply with the target and its own objectives in the 
coming years.

The region has a clear financial strategy shared between the executive and the 
administration, including well-defined budgetary and debt targets such as an 
operating balance above 17% of operating revenues (excluding the vocational 
training plan) and a direct debt to operating balance below 6x-7x over the 
mandate. The region's management has shown its ability to fully meet these 
targets by taking appropriate budgetary decisions when needed. Thanks to its 
tight budget control, the region should post a sound debt-to-operating balance 
ratio better than its target, at 5x in 2021 under our base case. The region 
regularly monitors deviations from budgeted figures and we believe the 
management would take measures should the metrics significantly deviate from 
the mandate's objectives. We also think the region has very detailed and 
accurate financial planning, as well as prudent and strong debt and liquidity 
management. In addition, the region is aiming to strengthen its infra-annual 
budget execution monitoring and to improve the effectiveness of public action 
by implementing performance indicators for its public policies. Finally, the 
region is also developing an Environmental, Social, and Governance strategy, 
which should include improving energy efficiency in public buildings, 
including high schools. 

In our view, BFC benefits from its wealthy economy. The region is one of the 
most industrialized in France, with 17% of industrial employment concentrated 
around automotive, horology, jewelry, and metallurgy. Socioeconomic indicators 
are strong by international standards, with GDP per capita estimated at 
€26,600 in 2017 (Eurostat), below the national level (€34,300). Although 
growth prospects have historically been below the national level, the gap has 
been narrowing over the past few years.

The ratings also reflect BFC's very low contingent liabilities, supported by a 
negligible level of guarantees to self-supporting entities and few 
modest-sized government-related and off-balance-sheet entities.
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