Rating Action: Moody's upgrades the rating of Ville de Neuilly-sur-Seine to Aa2, changes the outlook to stable from positive
Global Credit Research - 28 Aug 2020
Paris, August 28, 2020 -- Moody's Investors Service, ("Moody's") has today upgraded Ville de Neuilly-sur-Seine's long-term issuer rating to Aa2 from Aa3, affirmed the Prime-1 short-term issuer rating and changed the outlook to stable from positive.
"Neuilly-sur-Seine's upgrade to Aa2 and the affirmation of its Prime-1 rating reflects the city's long-standing strong operating performance, its commitment to fiscal discipline, as well as the attractiveness of its territory located near Paris in the wealthy Département des Hauts de Seine. These strengths bolster resilience to face the near- and medium-term consequences of the coronavirus-induced economic downturn and a potential evolution in France's equalization system that could affect the nature and level of the city's revenue," says Cédric Poynard, the lead analyst for the city. "While in the near term, the city's debt burden will increase, it will do so from very low levels. Neuilly's budget management track record indicates that, once the most acute phase of the crisis has passed, its credit metrics will remain consistent with a Aa2 rating ."
Today's rating action reflects the city's sustained improvements in its financial strength as evidenced by its very low debt burden and strong operating balance which bolsters resilience to the near- and medium-term implications of the coronavirus economic crisis. Moody's expects the city to maintain its fiscal discipline that will translate into only a moderate debt growth in the coming years as Neuilly implements its capital expenditure programme.
In line with its successful track record of limiting operating expenditure growth, Neuilly-sur-Seine's wealthy territory will limit the increase in social expenses in the next few years while tax revenue will remain stable. The city is delaying some capital expenditure, cutting to 9 million from the 2020 budget, while prudent planning of revenue, especially for the potentially variable property transfer tax, leaves a possibility for higher-than-budgeted outcomes. Although its gross operating balance (GOB) will decrease markedly from the high level seen in 2019, Moody's expects it to remain on average at 13% of revenue in the next three years, a high level compared to similarly-rated regional and local governments. Additionnally, Neuilly's tax rates are among the lowest in France and grant the city higher than average financial flexibility and attractiveness
The credit profile of Neuilly-sur-Seine also benefits from one of the wealthiest population in France, with gross domestic product per capita in the departement more than three times above the national average. The city is home to many corporate headquarters, in particular in the luxury goods industry. The city's main investment programme -- the urbanization of the main road that divides the city in two and connect the region's main business district--, will strengthen its attractiveness. This programme will incur new debt projected to peak at 63 million in 2022 or 34% of revenue, lower than the 72% that Moody's previously expected.
The upgrade to Aa2 also takes into account other medium-term challenges the city is facing. As a wealthy territory, Neuilly-sur-Seine is a net contributor to equalization payments between local governments and Moody's rating reflects a moderate risk of negative pressure for the city on revenue from this front. The city may also see a further transfer of spending responsibility to the inter-municipality, with a loss of the associated revenue. While such developments would negatively affect revenue and constrain the city's budget flexibility, Moody's expects Neuilly-sur-Seine to mobilise the strength of its budget management to adjust to moderate changes, while broad-ranging changes are unlikely in the forseeable future.
The Prime-1 short-term rating reflects Neuilly's secure liquidity position. The entity, like all the French regional and local governments, benefits from regular and predictable cash-flows, in particular monthly tax revenue. The city has access to 10 million of committed bank facilities and Moody's expects it to secure additional liquidity facilities by the autumn.
RATIONALE FOR STABLE OUTLOOK CHANGE
The stable outlook reflects Moody's view that Neuilly's financials and debt metrics will remain consistent with a Aa2 rating, even in the face of depressed revenue for some time as the coronavirus-related economic crisis unfolds.
Neuilly-sur-Seine's rating incorporates a baseline credit assessment (BCA) of aa2 and a moderate likelihood of extraordinary support from the government of France (Aa2 stable).
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
In Moody's view, environmental considerations are not material to Neuilly-sur-Seine.
Social considerations are material to Neuilly-sur-Seine's credit profile. Socially driven policies and socio-economic issues can affect the city's credit profile. The city's wealthy socio-economic environment limits the need for social expenses and increases tax revenue. In the current context, we view the coronavirus outbreak as a social risk under our ESG framework, given the associated relief measures and its expected impact on economic growth and consequently on Neuilly's revenues and expenditures.
Governance considerations are material to Neuilly-sur-Seine's credit profile. We assess Neuilly-sur-Seine's governance as strong as evidenced by its prudent prudent fiscal and debt management practices.
The specific economic indicators, as required by EU regulation, are not available for this entity. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.
Sovereign Issuer: France, Government of
GDP per capita (PPP basis, US$): 47,223 (2019 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.5% (2019 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6% (2019 Actual)
Gen. Gov. Financial Balance/GDP: -3% (2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.7% (2019 Actual) (also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: aa3
Default history: No default events (on bonds or loans) have been recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 25 August 2020, a rating committee was called to discuss the rating of the Ville de Neuilly-sur-Seine. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength ; the issuer's governance and/or management ; and the issuer's fiscal or financial strength, including its debt profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
In the absence of an upgrade in France's sovereign rating, an upgrade of Neuilly-sur-Seine's rating is unlikely since at Aa2, the rating is at the same level as the sovereign rating, and the city's fiscal flexibility is limited by France's institutional arrangement for local governments.
A combination of the following factors may exert downward pressure on the ratings : (1) a change in the equalization system that would increase Neuilly-sur-Seine's net contributions ,and would materially lower revenue and the gross operating balance on a sustained basis; (2) fixed capital investment plan that would drive Neuilly-sur-Seine's debt over 65% of operating revenue.
Any downgrade of France's rating would most likely have negative implications on Neuilly-sur-Seine's rating. However, this is currently unlikely given the Government of France's Aa2 rating with a stable outlook.
The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
This rating action took place at the time specified on the sovereign release calendar.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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Cedric Poynard Analyst Sub-Sovereign Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Marie Diron MD - Sovereign Risk Sub-Sovereign Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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