French Department of Seine-et-Marne Outlook Revised To Positive On Potentially Stronger Consolidation; Ratings Affirmed


  • We think Seine-et-Marne's strong financial management will result in structural surpluses and could allow for a reduction of its debt burden over 2019-2021 beyond our expectations, despite a step-up in investments.
  • As such, we are revising the outlook on Seine-et-Marne to positive from stable, and affirming our 'AA-/A-1+' ratings.
  • Nevertheless, we will continue to pay particular attention to the likely upcoming local tax reform, which could hamper this potential improvement.

Rating Action

On May 17, 2019, S&P Global Ratings revised its outlook on the French Department of Seine-et-Marne to positive from stable. We affirmed the 'AA-' long-term and 'A-1+' short-term issuer credit ratings on the department.
At the same time, we affirmed our 'AA-' long-term issue rating on the department's €1 billion Euro Medium-Term Note program and our 'A-1+' short-term issue rating on its €250 million French commercial paper (NEU CP) program.

Outlook

The positive outlook reflects our expectation that Seine-et-Marne could reduce its debt burden over the next two years beyond our current expectations--with tax-supported debt standing below 60% of consolidated operating revenue and a debt to operating margin structurally below 3x--thanks to even stronger financial management, including very tight control over operating expenditure and strengthened debt and liquidity management. Nevertheless, we will continue to pay particular attention to the likely upcoming local tax reform, which could hinder this improvement.
Downside scenario
We could revise the outlook to stable in the next two years if management was unable to structurally reduce its debt burden. We could also revise the outlook to stable if we consider that the upcoming local tax reform had a significant negative impact on French departments' flexibility or budget structure.

Rationale

We think Seine-et-Marne benefits from solid financial management, reflected in its tight control over operating expenditure and its active debt and liquidity management. We expect the department will maintain very strong budgetary performance, with surpluses after capital accounts averaging 2% of total revenue per year over 2019-2021, despite a step-up in investments. This would allow for a further reduction of its debt burden. Budgetary flexibility is structurally weak, however, and could deteriorate further with the upcoming local tax reform, which could also increase the volatility of French departments' budgetary performance.
Seine-et-Marne benefits from solid financial management and a strong economy, but upcoming tax reform could limit budgetary flexibility
Seine-et-Marne exhibits transparent disclosures; a clear and realistic budgetary strategy; realistic financial planning; good budget monitoring--which is now formalized in the budgetary contract with the central government--including a prudent approach toward property transfer fees; tight monitoring of its government-related entities (GREs); and proactive and prudent debt and liquidity management, with a diversified pool of lenders and liquidity facilities. We also view positively the very strong political and managerial commitment from Seine-et-Marne's elected officials and management to maintain sound budgetary performance and limit debt growth through expenditure control, as well as their ability to make appropriate decisions to meet these targets. This commitment has allowed for a significant debt reduction over the mandate. Under our base case, direct debt will decrease by €28 million a year on average over 2019-2021 (more than 3% of its debt stock).
We believe this strong financial management partly compensates for highly rigid expenditure. Nevertheless, the likely upcoming tax reform might further reduce the department's budgetary flexibility. The department could lose most of its already weak revenue flexibility (modifiable tax revenue accounts for less than 30% of operating revenue in our base case). We understand the reform, which is supposed to be part of the 2020 Finance Bill, would remove departments' only real fiscal leeway, property tax. This could be offset by a fraction of a national tax, with no tax leeway.
In our view, this reform could put departments under pressure, since they already suffer from structural revenue and expenditure imbalances, with generally weak budgetary flexibility, and bear high exposure to the economic and real estate cycles. Our assessment of the institutional framework for French departments is thus less favorable than that of other French local and regional governments. The positive trend for French departments' institutional framework we have seen from November 2017 reflects more favorable economic, financial, and institutional conditions following the stabilization of state transfers. If the local tax reform translates into a loss of property tax for departments without the appropriate compensation, we might consider that the trend for departments' institutional framework was no longer positive.
In contrast, other developments are credit positive for Seine-et-Marne's performance. In particular, departments in the Region of Ile-de-France established an interdepartmental investment fund ("fonds de solidarité interdépartemental d'investissement", FS2I), with €150 million distributed as capital subsidies as of 2019. The net impact for 2019 is favorable for Seine-et-Marne, with the department contributing €13 million and receiving €22 million.
We do not include in our base case Seine-et-Marne's potential participation (with the other departments of the Region Ile-de-France) in the bid for buying central government shares in the operator of international airports in Paris ("Groupe ADP") given the uncertainty around the privatization project. If the project were to materialize, we believe Seine-et-Marne's participation in the bid would be relatively low.
With about 1.4 million inhabitants, Seine-et-Marne is a department in the Region of Ile-de-France that includes Paris and surrounding departments. Its socioeconomic indicators are very strong in national and international contexts, in our opinion. We estimate its GDP per capita at about €31,200 in 2018, and we view growth prospects as above average by national and international standards. The department's economy is diversified, with dynamic and expanding tertiary and industrial sectors.
Seine-et-Marne will generate strong surpluses, enabling significant debt reduction through 2021
We expect Seine-et-Marne will post very strong budgetary performance in the coming years. We anticipate the operating balance will average 14.7% of operating revenue in 2019-2021. This strong operating performance is from the department's tight control of operating expenditure, which we expect will increase on average by 0.8% in 2019-2021 and partly offset potentially lower property transfer fees from 2019. In turn, we forecast a strong surplus after capital accounts, at 2.1% of total revenues in 2019-2021, despite capital expenditure climbing to €218 million on average over the same period (€205 million in our previous base case), after €172 million in 2018, in line with the department's willingness to increase investments.
Thanks to its large surpluses, the department's debt stock is set to shrink over our forecast period, despite the step-up in capital expenditure. Tax-supported debt--which adds non-self-supporting guarantees and the fire department's debt to the direct debt stock--stands at 60.8% of operating revenue in 2021 under our base case, compared with 65.5% in 2018. Interest costs will remain moderate, at about 1.2% of annual operating revenue over 2019-2021, by our estimate.
Given the decreasing debt burden and thanks to its proactive liquidity management, Seine-et-Marne's debt service coverage remains high. The department currently has €90 million available in liquidity lines, €48 million in revolving loans, and a €70 million multiyear loan from the European Investment Bank. Over the next 12 months, we forecast that the average amount available on these facilities and the average amount of cash will continue to cover more than 120% of debt service (including an average amount of €50 million in outstanding NEU CPs).

We also consider that the department has moderate contingent liabilities. Self-supporting guarantees (39% of operating revenue at year-end 2018) and Seine-et-Marne's GREs are mainly linked to the social housing sector, which has strong regulation and oversight from the central government, thereby moderating risks in the industry.
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