Scope Ratings GmbH has today affirmed the City of Quimper’s long-term issuer rating at A+ and short-term issuer rating at S-1+. The sub-sovereign’s senior unsecured debt is also affirmed at A+. All ratings are expressed in both local and foreign currency. All Outlooks are Stable.

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Rating drivers

The A+ rating reflects the city’s solid operating performance, conservative budgetary management, low interest-payment burden and favourable debt profile. The rating is also supported by a credible fiscal framework for French municipalities which contributes to high transparency and budgetary discipline at the local level, with a prudent fiscal policy defined at the central government level. Constraints to the ratings relate to the Quimper’s elevated debt levels relative to its current revenue and limited budgetary flexibility. In addition, a small economy which is only partly offset by a growing tax base, heightens Quimper’s budgetary sensitivity to shocks. The Stable Outlook reflects Scope’s assessment that the risks that Quimper faces remain well-balanced.

Quimper benefits from a solid operating performance, with high operating margins averaging 18.3% of operating revenue over the past five years, serving as a buffer against adverse budgetary developments. In 2018, the operating surplus reached 20.5% of operating revenue, the highest since 2012, reflecting the city’s favourable tax revenue growth, conservative budgetary management and continuous cost containment. Scope expects operating performance to remain strong, given: i) the favourable economic environment – which should support tax revenue growth; and ii) our expectation of stabilising state transfers, following significant reductions in recent years. Based on Quimper’s budgetary planning, Scope expects the operating surplus to represent around 17.1% of operating revenues in 2019.

As a result of solid debt management and favourable tax revenue growth, Quimper benefits from a low interest-payment burden, strengthening the city’s debt affordability. Interest payments as a percentage of operating revenue have declined since the peak of 2.1% observed during the 2014-16 period and reached 1.7% as of year-end 2018, strengthening the city’s fiscal position. The city’s debt affordability is also underpinned by a favourable debt profile. The city has no foreign-denominated debt and no short-term debt with an average life of 5.2 years, which reduces currency and refinancing risks. Similarly, interest rate risks are also limited in view of a low share of variable-rate debt (22.5% of the total debt stock at year-end 2018).

Risks linked to contingent liabilities have also reduced with outstanding guarantees – which were mostly granted to low-risk social housing institutions - declining steadily from 65.2% of operating revenue in 2011 to 34.3% of operating revenue in 2018. Scope expects Quimper’s contingent liabilities to continue decreasing as more responsibilities are transferred to the intermunicipal grouping and less guarantees are granted by the city.

The A+ rating is underpinned by a credible fiscal framework which contributes to budgetary discipline at the local level, with a prudent fiscal policy defined at the central government level. Following several territorial reforms in France, we expect the institutional framework to remain stable, apart from the local tax reform. Fiscal rules for French local authorities, the regulatory framework and government oversight are strict in an international context, favouring budgetary consolidation and promoting fiscal responsibility and transparency at the local level. In addition, the local tax revenue structure grants French municipalities high levels of budgetary flexibility compared to international peers.

Despite these credit strengths, the city’s A+ rating is constrained by several weaknesses. Firstly, the city’s debt levels remain elevated both in a national and international context. Quimper’s direct debt increased significantly from around EUR 37m in 2012 (50.5% of operating revenue) to around EUR 56m in 2018 (75.4% of operating revenue). Similarly, debt service relative to the city’s operating activities (46.3% of the current balance in 2018) remains high. As a positive development, Scope notes that the city’s nominal debt levels decreased in 2017-18, driven by a net debt redemption of EUR 6.6m. However, the 2019 budget conservatively projects a slight increase in debt as new borrowing (EUR 9m) is expected to outweigh debt redemption (EUR 6m). Consequently, Scope expects the debt burden to remain broadly stable.

A key rating constraint to Quimper’s A+ rating is the city’s narrow economic base, with a total population of 66,959 in 2018, which has only increased slightly over the past five years. In Scope’s view, the narrow economic base heightens the sensitivity of Quimper’s budgetary performance adverse economic conditions. This risk is only partly mitigated by i) sound development of the city’s socio-economic indicators which support the expansion of its tax base and ii) the importance of Quimper in the region with access to well-developed transport infrastructure (including an airport and commercial harbour).

Finally, challenges relate to Quimper’s limited budgetary flexibility, given the city’s rigid expenditure structure and administration’s revenue strategy to avoid increases in local tax rates. Expenditure flexibility is constrained by Quimper’s: i) high share of personnel expenditure (50.0% of operating expenditure in 2018); and ii) decreasing capital expenditure as share of total expenditure since 2014 (from 30.5% in 2014 to 22.1% in 2018) as the city adapted to cuts in state transfers. Given the already large reductions achieved over the 2014-17 period, Scope views the city’s potential for further substantial cost savings in key current expenditure items and investments as unlikely. In addition, while Quimper’s ratings benefit from a high proportion of modifiable taxes in an international context, revenue flexibility is limited in view of: i) the fact that the local tax rates currently applied by the city are above the national average, making any future tax hikes politically difficult; and ii): the city’s administration strategy to hike tax local rates only as a last resort, a policy the city has been pursuing since 2015.

Going forward, the city aims to achieve further savings by, among others, enhancing the energy efficiency of its public real estate assets and realising synergies with its intermunicipal grouping (Quimper Bretagne Occidentale). In view of continued capital expenditure needs, diminishing flexibility to reduce operating and expenditure and non-willingness to increase local tax rates, Scope expects only limited improvements in Quimper’s budget balances.

Long-term environmental and social risks

Alongside our assessment of rating-relevant credit risks, we consider long-term environmental and social developments. We assess developments regarding French municipalities by analysing environmental and social policies at the local level as well as regional sustainability indicators.

With regards to environmental indicators, the Climate Group states that Brittany emits around 20.5 m tons of greenhouse gas (GHS) per year, representing around 4-5% of France’s total emissions. The region targets GHG emissions reductions of 20% by 2020 and 80% by 2050, in line with current EU targets. Brittany also aims to produce a fifth of its primary energy and over a third of its electricity from renewable sources by 2020. The City of Quimper has made investments in this context to improve the energy efficiency of public buildings and achieve higher standards of sustainability.

With regards to social policies, the city benefits from the extensive presence of social and cultural associations which support social cohesion. The city has its own social welfare centre, in charge of social initiatives aimed at supporting the elderly and disabled as well as promoting social and occupational integration.

Scope does not see credit-relevant risks related to environmental and social developments.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s assessment that the risks Quimper faces remain balanced.

The ratings could be upgraded if: i) Quimper’s debt levels were notably reduced with a firm downward trajectory; or ii) there were structural improvements in the city’s budgetary performance.

Conversely, the ratings could be downgraded if: i) there were to be a notable increase of debt; or ii) if budget performance were to deteriorate.

Rating committee
The main points discussed by the rating committee were: i) institutional framework for French cities; ii) City of Quimper´s debt burden and profile, iii) contingent liabilities; iv) liquidity profile; v) budget performance and flexibility; vi) investment policy and borrowing needs vii) economy and social profile; viii) governance and transparency; ix) peers comparison.

Methodology
The methodology applicable for this rating and/or rating outlook, Sub-Sovereign Credit Rating, published on 7 June 2019, is available on www.scoperatings.com. 
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as 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.

Solicitation, key sources and quality of information
The rated entity participated in the ratings process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, public domain. Key sources of information for the rating include: City of Quimper, OECD, European Commission, Eurostat, The Quality of Governance Institute, INSEE, Direction générale des finances publiques, Procos, CCI Bretagne, Chambre régionale des comptes de Bretagne, historical figures on budget implementation, actual financial figures, budget for the current year, 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.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead Analyst: Rating prepared by Jakob Suwalski.
Person responsible for approval of the rating Dr Giacomo Barisone, Managing Director.
The ratings/outlook was first released by Scope on 13 November 2015. The last rating action was on 27 April 2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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