French Intercity Saint-Quentin-En-Yvelines Outlook to Stable from Positive on Slowed Debt Reduction; 'AA-/A-1+' Affirmed

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Research Update: French Intercity Saint-Quentin-en-Yvelines Outlook To Stable From Positive On Slowed Debt Reduction; 'AA-/A-1+' Affirmed

December 11, 2020

Overview PRIMARY CREDIT ANALYST

- Saint-Quentin-en-Yvelines will likely see a smaller surplus after capital accounts and reduce Stephanie Mery debt at a slower pace over the coming two years due to COVID-19-related constraints on Paris revenue, increased contributions to equalization, and trimmed central government transfers. + 0033144207344 stephanie.mery - Nevertheless, we expect the intercity's robust liquidity position, tight control over operating @spglobal.com expenditure, and decelerated capital expenditure will soften the impact on its budgetary SECONDARY CONTACT results. Hugo Soubrier - We are revising our outlook on Saint-Quentin-en-Yvelines to stable from positive and affirming Paris our 'AA-/A-1+' ratings. hugo.soubrier @spglobal.com - The stable outlook reflects our expectation that, despite a contraction in the operating margin ADDITIONAL CONTACT through 2020-2022, Saint-Quentin-en-Yvelines' economic activity will begin to recover from mid-2021, with gradually improving budgetary results that usher in robust operating balances EMEA Sovereign and IPF and a slowly declining debt burden over the outlook horizon. SovereignIPF @spglobal.com

Rating Action

On Dec. 11, 2020, S&P Global Ratings revised its outlook on French Intercity of Saint-Quentin-en-Yvelines (SQY) to stable from positive. At the same time, we affirmed the 'AA-' long-term and 'A-1+' short-term issuer credit ratings.

Outlook

The stable outlook reflects our expectation that, while reduced revenues and, in particular, a temporary decrease of corporate value added tax (CVAE) will weaken SQY's fiscal results, the intercity's budgetary positions are strong enough to withstand COVID-19-related headwinds. We currently assume that SQY will continue to implement its investment program, albeit with less

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vigor than historically. This will dent surpluses and drag on SQY's efforts to alleviate the debt burden.

Downside scenario

We could lower the ratings in the next two years if the effects of the pandemic contributed to a larger contraction and prolonged weakness in operating revenues. Ratings pressure could also stem from looser fiscal discipline that resulted in weaker performance and a less favorable liquidity position.

Upside scenario

We could raise the ratings over the next two years if the intercity were to restore its budgetary performance and result in robust operating balances, for example, that would enable SQY to reduce its debt burden faster than we currently forecast, while maintaining a very favorable liquidity position.

Rationale

We expect COVID-19-related economic impacts will weigh on SQY's operating revenue in the next couple of years. This, alongside increasing contributions to equalization and marginally lower central government transfers, slightly deteriorates the intercity's operating balance. However, we expect SQY to weather the shock and continue to report strong credit metrics, thanks to its disciplined pursuit of financial stability and expenditure control. Although the debt burden remains comparatively high, we recognize the intercity's commitment to deleveraging and we think it will ease its debt burden over the next two years thanks to structural, albeit lower, surpluses. Furthermore, SQY has solid liquidity. The intercity's new executive government, appointed after the June 2020 local elections, will decide on its capital plan in first-quarter 2021. We will monitor the plan's effect on budgetary and liquidity metrics.

Sustained--but reduced--surpluses should help SQY gradually alleviate its debt burden by 2022

COVID-19 fallout will have a limited impact on SQY's operating performance in 2020. More severe effects, however, will materialize in 2021 and 2022, due to the upcoming sharp decline in the CVAE (almost one-fifth of operating revenue in 2020). We estimate the French economy will contract by 9% in real terms this year, and this will likely prompt a drop in value-added taxes that will primarily affect revenue in 2022 because of advance payments. This, coupled with increasing contributions to equalization and marginally lower central government transfers, leads us to expect a slight deviation in the budget trajectory compared with our previous forecasts. In our base-case scenario, we expect SQY's operating surpluses will remain high, averaging 19% of operating revenue through 2022 (versus 27% in 2019). SQY's operating performance benefits from its tight control over operating expenditure (opex), with precise savings targets that make allowances for the rise in equalization spending. Together with capital revenue, these operating surpluses will fully cover the intercity's capital expenditure, which we expect will average €44 million per year over 2020-2022. Although the average balance after capital accounts should decrease through 2022 (to 6.5% of total revenue on average from 8% in 2019), budgetary performance remains very strong in an international comparison.

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Thanks to a track record of very strong performance, SQY has significantly reduced its direct debt. We now anticipate that debt will decrease, although at a slower pace, by 2022. We forecast tax-supported debt, which includes public-private partnerships, at 167% of operating revenue at end-2022, compared with 175% in 2019. We consider exposure to contingent liabilities as significant. That said, we believe the corresponding risks are low given that those liabilities mainly relate to social housing, for which we consider the national financial and regulatory framework supportive.

Recurring surpluses, notably on the ancillary budget for urban planning, enabled material cash accumulation. We expect cash will amount to more than 100% of the debt service in the next 12 months. In addition, SQY has satisfactory access to external liquidity sources, demonstrated by regular access to a varied pool of domestic banks. Moreover, like all French local and regional governments, SQY benefits from regular and predictable cash flows from central government transfers and tax payments.

Prudent financial management, a wealthy and resilient local economy, and the institutional framework keep COVID-19-related headwinds at bay

Located in the wealthy department of Yvelines, near Paris, SQY is a prominent economic center in terms of business and research on both the regional and national level. This translates into a comparatively high GDP per capita nationally. SQY is home to many corporate headquarters and research and development centers. Although the notable presence of the automotive sector creates some concentration, we note that the local economy has been gradually diversifying toward the aeronautics and banking sectors, among other industries. Still, we observe that these sectors in particular will be severely hit by the recession and restrictions triggered by the pandemic.

SQY operates within an institutional framework that is marked by a high degree of stability and flexibility in an international context. French intercities generally have the ability to match expenditure well with revenue and often anticipate reforms well in advance. The French parliament approved in December 2019 a national reform of local taxation. As a result, from 2021 French intercities will not receive the proceeds of the housing tax (10% of SQY's operating revenue in 2020). Instead, they will receive a share of national VAT without any leeway on the rate. In 2021, SQY will receive a share equal to the proceeds of the housing tax in 2020. Then, because the amount of VAT will fluctuate with economic growth, the intercity will not bear the cost of the likely drop in VAT in 2020. We believe this would have a limited impact in terms of SQY's revenue flexibility and revenue growth in the medium term.

However, we anticipate that SQY's budgetary performance will feel the weight of an increase in the mandatory contribution to the municipal equalization fund. Because of its former special status as a "syndicat d'agglomération nouvelle" (SAN), SQY has contributed significantly less than other cities and intercities to this fund. The central government decided in 2018 to remove this advantage. Although the reform is gradual and should not have a substantial impact on a consolidated basis, it will constrain the main budget, which has to be balanced on a stand-alone basis. Tight control over spending should mitigate this pressure.

The intercity's management framework remains strong. It uses a prudent approach, consisting of solid budget monitoring, clear budgetary and debt targets, detailed and realistic financial planning, and careful debt management. We expect debt reduction will continue through 2022, though at a slower pace, but remain above SQY's own deleveraging target of at least €4 million per year. This will be achieved thanks to strong control over opex. We view positively management's decision to set precise savings targets in terms of opex in order to absorb the increase in

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equalization spending.

Environmental, social, and governance (ESG) credit factors for this credit rating change:

- Health and safety.

Key Statistics

Table 1

Intercity of Saint-Quentin-en-Yvelines Selected Indicators

--Fiscal year ends Dec. 31--

(Mil. €) 2018 2019 2020bc 2021bc 2022bc

Operating revenues 178 185 181 181 172

Operating expenditures 140 134 142 144 146

Operating balance 38 50 39 38 26

Operating balance (% of operating 21.5 27.3 21.3 20.7 15.4 revenues)

Capital revenues 26 21 16 20 35

Capital expenditures 39 54 47 43 43

Balance after capital accounts 26 17 7 15 18

Balance after capital accounts (% of total 12.5 8.2 3.7 7.2 8.7 revenues)

Debt repaid 31 33 31 32 34

Gross borrowings 10 15 19 17 30

Balance after borrowings 5 (1) (5) (0) 15

Direct debt (outstanding at year-end) 321 305 291 276 273

Direct debt (% of operating revenues) 180.0 165.1 160.7 152.4 158.6

Tax-supported debt (outstanding at 339 323 307 291 286 year-end)

Tax-supported debt (% of consolidated 190.6 174.6 169.7 160.7 166.6 operating revenues)

Interest (% of operating revenues) 4.5 4.2 4.4 4.4 4.2

National GDP per capita (single units) 35,303 36,216 33,345 36,121 37,599

The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. bc--Base case reflects S&P Global Ratings' expectations of the most likely scenario.

Ratings Score Snapshot

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Table 2

Saint-Quentin-en-Yvelines Ratings Score Snapshot

Key rating factors Scores

Institutional framework 2

Economy 2

Financial management 2

Budgetary performance 1

Liquidity 1

Debt burden 5

Stand-alone credit profile aa-

Issuer credit rating AA-

S&P Global Ratings bases its ratings on non-U.S. local and regional governments (LRGs) on the six main rating factors in this table. In the "Methodology For Rating Local And Regional Governments Outside Of The U.S.," published on July 15, 2019, we explain the steps we follow to derive the global scale foreign currency rating on each LRG. The institutional framework is assessed on a six-point scale: 1 is the strongest and 6 the weakest score. Our assessments of economy, financial management, budgetary performance, liquidity, and debt burden are on a five-point scale, with 1 being the strongest score and 5 the weakest.

Key Sovereign Statistics

Sovereign Risk Indicators, Oct 12, 2020. An interactive version is available at www.spratings.com/sri.

Related Criteria

- Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019

- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

- France 'AA/A-1+' Ratings Affirmed; Outlook Stable, Oct. 2, 2020

- Public Finance System Overview: French Cities, Intercities, And Municipal Syndicates, Aug. 4, 2020

- COVID-19: French Departments Face Marked Revenue Losses, While Regions Swerve Near-Term Fallout, May 28, 2020

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

www.spglobal.com/ratingsdirect December 11, 2020 5 Research Update: French Intercity Saint-Quentin-en-Yvelines Outlook To Stable From Positive On Slowed Debt Reduction; 'AA-/A-1+' Affirmed

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Outlook Action; Ratings Affirmed

To From

Saint-Quentin-en-Yvelines (Intercity of)

Issuer Credit Rating AA-/Stable/A-1+ AA-/Positive/A-1+

Senior Unsecured AA- AA-

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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