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TEXT-Fitch assigns Department of La Manche 'AA-' rating; outlook stable

(The following statement was released by the rating agency)

Oct 02 - Fitch Ratings has assigned the Department of La Manche 'AA-' Long-term local and foreign currency ratings and a 'F1+'Short-term foreign currency rating. The Outlook is Stable.

The ratings reflect La Manche's sound budgetary performance and debt in line with its peers. The ratings also take into account the developing liquidity coverage. The Stable Outlook indicates that Fitch is confident about the department's ability and willingness to maintain a sound financial profile.

A downgrade could result from La Manche's inability to control its operating expenditure and adjust its capital expenditure to its self-financing capacity (SFC; current balance plus capital revenue), which will result in a debt payback ratio above 10 years. Conversely, an improvement or stabilisation of the current margin for several consecutive years, leading to good debt coverage ratios combined with controlled capital expenditure could lead to an upgrade.

Short-term funding is covered by one committed bank liquidity line, which was reduced to EUR10m in 2012 from an initial EUR20m. The department is working on developing a cash flow forecast, but with revenue flows unpredictable, Fitch considers liquidity management as weak.

La Manche reported an operating balance of EUR82.8m at end-2011 or 17.6% of operating revenue. Fitch expects the operating balance to decrease to about EUR60m or 12% of operating revenue by 2016. Management's aim is to improve the match between the operating revenue and operating expenditure with a minimum requirement of operating balance at EUR50m. Fitch will monitor the financial measures taken by the department to achieve this goal.

Under the combined effect of an increase in the current balance and a decrease in investment, the SFC improved to 105.6%, excluding debt repayment, at end-2011. Fitch believes La Manche has some leeway in capex as about 20% relates to arbitration.

Direct debt was EUR296.7m in 2011 with a maturity life of 8.03 years and a debt payback ratio of 4.1 years. This is moderate compared with peers. Until 2016, La Manche aims to keep the debt payback ratio below 10 years. With an average of EUR90m per year of investment planned over 2012-2016, Fitch estimates that the department should comply its target in the medium term.

Although the structure of the local economy is less sensitive to national economic fluctuations, it does not generate high added-value. The population's wealth is below the national average while the wealth of elderly population is slightly above. In Q112, the unemployment rate (8.3%) was lower than the national average (9.6%). This implies that the department has below average expenditure needs for social spending compared with other departments.

Although the amount of guaranteed debt is high in absolute terms (EUR240.2m in 2011; 51% of operating revenue), Fitch considers risk related to guaranteed debt to be low. This is because of the solid borrower profile (mainly social housing institutions). The guaranteed annuity (principal plus interest) represented 6.2% of 2011's operating revenue.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))