Scope Ratings today affirms City of Quimper’s long-term local currency issuer rating at A+, following the revised sub-sovereign rating methodology. The agency also assigns a long-term foreign-currency issuer rating of A+, along with a short-term issuer rating of S-1+ in both local and foreign currency. The city’s senior unsecured debt in both local and foreign currency was also rated at A+. All Outlooks are Stable.

Rating drivers

The city’s ratings continue to be supported by the ability to maintain a solid operating performance with strong operating margins. The City of Quimper realised a strong operating surplus of 17.5% of operating revenues in 2016, which is in line with the performance during the previous years, and notably better than the forecasted 10.5% on budgetary data, reflecting Quimper’s conservative budgetary planning.

The high operating margins are serving as a buffer against ongoing cuts in state transfers, as well as still moderate, though higher, direct debt ratios and low-risk contingent liabilities. Quimper’s ratings benefit from good revenue flexibility, due to the high proportion of modifiable taxes, as well as tax rates that have been unchanged for years. Sound development of the city’s socio-economic indicators support the expansion of its tax base. The city’s administration also views tax rate hikes as a last resort, not planning tax hikes during their legislative period.

Looking forward, Scope continues to expect Quimper’s budget balances to remain under pressure due to continued capital expenditure needs and ongoing state transfer cuts, hence diminishing flexibility to reduce operating and capital expenditures, a policy the city has been pursuing since 2015. Scope notes that reductions in expenditures could become increasingly difficult due to Quimper’s relatively rigid operating expenditure structure. If the French central government continues to consolidate its budget beyond 2019, a scenario which Scope views as likely, the city will be forced to either raise its tax rates, asset sales, prioritize investments or increase its debt.

According to Scope’s estimates, Quimper’s direct debt ratios (86.4% of current revenues in 2016) will likely exceed 90% of current revenues in the following years, compared to 47.8% at the end of 2009. Consequently, the direct debt payback ratio -which was comfortably met at 5.6 years at year-end 2016- could exceed the threshold of 8 years in the following years. However, Scope’s estimate may be overstated due to Quimper’ conservative budgetary planning, and tendency to underestimate revenues and overestimate expenditures. Furthermore, Scope views positively that Quimper’s self-imposed threshold of 8 years is conservatively set relative to the restrictions under the new Finance Programming Bill (FFB) for 2018-2022 which was approved by the end of last year. The FFB will commit the largest municipalities in terms of budget size to keeping their debt payback ratios below 12 years, all departments below 10 and regions below 9 years.

Scope believes the city’s administration has the ability to take appropriate actions to ensure healthy fiscal performance over the medium term. The city’s strategy to cope with increasing revenue pressures includes personnel cuts by outsourcing IT and HR expenditures to Quimper Bretagne Occidentale, the inter-municipal association undertaking capital-intensive responsibilities on behalf of the city and neighbouring municipalities. Scope also views positively the city’s pro-active stance in dealing with long-term challenges to growth with its long-term plan for local development (PUL).

Quimper’s ratings are underpinned by a supportive French institutional system that has been evolving over the last years. A prudent fiscal policy is defined at the national level, state transfers are timely but being cut back, resulting in budgetary challenges for the sub-sovereigns. The system is characterised by close oversight, high transparency, strong institutionalization of budgetary processes and an equalization system which aims to smooth out disparities between sub-sovereigns. The recently approved Programming Bill (FPB) for 2018-2022, introduces additional rules to cap operating expenditure growth and limiting their debt payback ratios below defined levels.

Outlook and rating-change drivers

The Stable outlook reflects Scope’s expectation that the City of Quimper will continue to have good revenue flexibility and maintain a solid operating performance.

The A+ ratings could be upgraded if budget balances and debt levels stabilise. Conversely, the rating could be downgraded if Quimper’s debt were to rise significantly and notably exceed the self-imposed debt payback ratio of eight years.

For the detailed research report please click HERE.

Rating committee

The main points discussed by the rating committee were i) French institutional framework and recent reforms; ii) the city’s economic developments and policy priorities; iii) budgetary performance and city’s strategy related to ongoing cuts in state transfers; iv) debt structure and dynamics. On April 23rd, 2018, the rating committee discussed the city of Quimper rating. The committee decided to affirm the long-term local currency rating and assign for the first time the long-term foreign currency rating, the short-term foreign and local currency rating and the rating for senior unsecured debt in both foreign and local currency.

Methodology

The methodology applicable for this rating and/or rating outlook “Public Finance Sub-sovereign credit rating” is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Rating prepared by Jakob Suwalski, Lead Analyst
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director
The Rating for City of Quimper was issued for the first time in November 2015. The rating was last updated in May 2017.
The long-term foreign currency rating, the senior unsecured debt ratings as well as the short-term issuer ratings were assigned by Scope for the first time.
Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following material sources of information were used to prepare the credit rating: public domain, issuer, agents’ of issuer and third parties. Key sources of information for the rating include: Historical figures on budget implementation, actual financial figures, budget for the next year and multi-year budget forecasts, historical outstanding debt, debt obligations and guarantees, list of sponsored entities, socio-economic statistics. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.
Prior to publication, the rated entity was given the opportunity to review the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that review, the rating was not modified.

Conditions of use / exclusion of liability
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