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Rating action

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 remain Stable.

Summary and Outlook

The A+ rating reflects Quimper’s prudent and effective budgetary management, with a robust operating performance, low interest-payment burden, conservative debt management and favourable debt profile. These factors, combined with a less cyclically exposed revenue structure and a supportive institutional framework, help to limit the impact of the Covid-19 economic shock on Quimper’s finances. Credit challenges relate to elevated direct debt levels, limited revenue flexibility and a narrow economic base.

The Stable Outlook reflects Scope’s assessment that the risks Quimper faces remain well 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) debt increased notably; or ii) budgetary performance were to deteriorate.

Rating rationale

The A+ rating reflects Quimper’s prudent and effective budgetary management, which has translated into strong operating performance in recent years. In line with other French municipalities, Quimper faced significant external budgetary pressures in the form of declining state transfers over 2014-17. It managed to adapt to a EUR 3.3m decline (-17%) in intergovernmental transfers by implementing substantial fiscal consolidation measures, which allowed it to maintain its operating surplus above 17% of operating revenue throughout the period. Since 2017, when the decrease in state transfers abated, Quimper has consistently improved its budgetary performance, with its operating surplus reaching 21.4% of operating revenue in 2019 (based on preliminary estimates), the highest since 2011 and up from the 2014 low of 17.1%. Quimper’s continuous and pro-active cost savings strategy has allowed the city to decrease its operating expenditure by 13% from 2014 to 2019. The French institutional framework, which is characterised by strict fiscal rules for French local authorities, including the requirement to adopt balanced budgets, contribute to the city’s prudent budgetary management.

Quimper’s 2020 budget projected an operating surplus of 17.2% of operating revenue. While the Covid-19 pandemic will lead to a significant deterioration of the local economy, Scope expects a limited impact on the city’s finances due to considerable budgetary and institutional buffers. Quimper’s budget, in line with that of other French municipalities, is less cyclically exposed due to the high share of operating revenue from residency and property taxes (62% of operating revenue), whose fiscal base – registry rental values – is typically insulated from economic shocks. The city also has a large share of investments (25% of total expenditure) that can be postponed to absorb adverse budgetary developments. This will provide a substantial cushion to the city’s finances, bolstered by upcoming financial support from the central government as outlined in the third amendment to the 2020 budget (EUR 4.5bn of additional transfers to regional and local authorities). The city’s latest projections foresee a net decrease in its operating balance by around EUR 1.3m, driven by lower revenue due to a reduced service offering during the lockdown as well as fee and tax exemptions granted to businesses and households. This will result in an operating surplus of 15.7% of operating revenue in 2020, slightly less than budgeted.

The A+ rating is also underpinned by Quimper’s low interest-payment burden, which strengthens its debt affordability. Interest payments as a percentage of operating revenue declined to 1.7% in 2018-19 from the 2.1% peak in 2014-16. Scope expects the city’s interest payment burden to continue to decline along with the long-term downward trend in interest rates and its investments to continue to be financed at favourable terms. Quimper has a stable and diversified investor base, with good banking relationships with nine credit institutions that include major banks. Thanks to the multitude of funding sources and a liquidity facility with a EUR 6m total drawdown, the city’s funding flexibility is strong vis-à-vis national peers. Scope views the risk of liquidity shortages as negligible given the city’s sound liquidity and the French government’s commitment to providing an additional backstop via exceptional support mechanisms. The city’s ability to secure low-cost financing was highlighted in September 2019 when it took out a 15-year loan with a fixed rate of 0.47%. A decreasing share of interest paid in the city’s budget will support expenditure flexibility and debt affordability over the medium term.

Quimper also employs prudent financial management, which is reflected in its favourable debt profile. The city has no foreign-currency debt and no short-term debt, according to the 2020 budget. Quimper faces low refinancing risks, with an average residual maturity of nine years, as well as low interest rate risks, with 77% of debt at fixed rates. In addition, contingent risks are low as outstanding guarantees were mostly granted to low-risk social housing institutions. The city’s contingent liabilities have gone down from over 65% in 2011 to 34% of operating revenue in 2019 and will continue on this trajectory as the responsibility for social housing has shifted to the intermunicipal grouping.

Despite these credit strengths, the A+ rating remains constrained by several challenges.

First, Quimper’s direct debt levels remain elevated in a national and international context despite recent improvements. Quimper’s direct debt as a percentage of operating revenue stood at 78% in 2019, lower than the 2016 peak of 86% but still comparatively elevated and well above 2011 levels (49%). Scope positively notes the nominal debt reductions of around EUR 9.2m over the past three years. This has been driven by Quimper’s improving operating performance, which has increasingly allowed it to self-finance its investments, thereby limiting its recourse to debt. Scope will monitor the city’s ability over the medium term to effectively balance fiscal discipline with the need to invest in local infrastructure and support the local economy in a more challenging economic environment.

Second, the city’s limited revenue flexibility and rigid operating expenditure structure present challenges. Expenditure flexibility is constrained by Quimper’s high share of personnel costs (46% of operating expenditure). Revenue flexibility is limited by: i) local tax rates being above the national average; ii) the city’s political commitment to maintain tax rates at 2014 levels; and iii) a deteriorating economic environment due to the Covid-19 crisis, which make any future tax hike politically costly. Moreover, Scope expects no major savings in the city’s operating costs going forward as these have already been realised. Scope notes, however, that Quimper’s budgetary flexibility has improved in recent years due to a higher share of capital expenditure, which rose to 25% of total expenditure in 2019, the highest since 2015.

Finally, the A+ rating remains constrained by the city’s narrow economic base. Its population has stagnated over the past decade and stood at below 67,000 in 2019. This exposes Quimper to budgetary shocks linked to a deterioration in the local economy and adverse demographic developments. With the natural rate of population growth essentially at zero, combined with an ageing population, the city’s ability to attract and retain residents will be key in supporting its long-term fiscal performance. In this regard, Quimper benefits from locational benefits as a key city in Brittany, with access to developed transport infrastructure. Quimper’s economic profile is also supported by the strength of Brittany’s, which typically outperforms the national average in terms of growth and labour market indices, on top of the region’s relative resilience to the Covid-19 shock owing to a high share of agriculture and agribusiness activity.

Factoring of ESG

Governance considerations are material to Quimper's rating and are included in Scope’s institutional framework assessment and assessment of Quimper’s individual credit profile, highlighting the city’s high quality of governance alongside the administration’s conservative budget management and prudent liquidity planning.

Social considerations are included in Scope’s assessment of Quimper’s ‘economy and social profile’, highlighting the city’s unfavourable demographics.

Alongside an assessment of rating-relevant credit risks, Scope considers long-term environmental and social developments. Developments regarding French municipalities were assessed 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 20.5m tonnes of greenhouse gases per year, representing around 4.4% of France’s total emissions. The region is targeting reductions in greenhouse gas emissions 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. In line with these aims, Quimper is investing to improve the energy efficiency of public buildings and achieve higher standards of sustainability.

With regards to social policies, the city’s social cohesion benefits from the extensive presence of social and cultural associations as well as its own social welfare centre.

Institutional framework assessment

Scope’s institutional framework assessment determines the intergovernmental integration between sovereign and sub-sovereign levels. Scope uses three key analytical factors to assess systemic support: i) institutionalised support; ii) fiscal interlinkage; and iii) political alignment between government tiers. The outcome of this assessment results in a downward rating range between the sovereign rating and the rating of the sub-sovereign entity of between zero notches (‘high’ integration) and 10 notches (‘low’ integration).

Scope considers the institutional and financing framework under which French municipalities operate to display ‘medium’ levels of integration for i) institutionalised support; ii) fiscal interlinkage; and iii) political alignment. Consequently, Scope’s assessment results in an indicative downward rating distance of maximum five notches between the French sovereign (AA/Stable) and the rating of an individual municipality.

The results have been discussed and confirmed by a rating committee.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope assesses the individual credit profile based on a qualitative and quantitative analysis of four key risk categories: i) debt burden and liquidity profile; ii) budget performance and flexibility; iii) economy and social profile; and iv) quality of governance. This risk assessment is conducted on a scale from 1 to 100, whereby a high (low) score is associated with a strong (weak) credit profile.

Scope assesses Quimper’s individual credit profile as strong, reflecting the outcome of the quantitative Core Variable Scorecard and the qualitative assessment (QS) in the four respective categories as defined above (individual credit profile score equal to 67 of 100).

The review of potentially exceptional circumstances that cannot be captured by the quantitative and qualitative scorecards did not lead to further adjustments of Quimper’s indicative rating of A+.

The results have been discussed and confirmed by a rating committee.

Rating committee
The main points discussed by the rating committee were: i) the French institutional framework and support mechanisms; ii) Developments in Quimper’s individual credit profile pre-Covid 19 crisis; iii) impact of Covid-19 on Quimper’s finances; iv) results of local elections.

Methodology
The methodology used for this rating and/or rating outlook (Rating Methodology: Sub-Sovereigns, 18 May 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 and/or its agents participated in the ratings process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity and public domain. 
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 the issuance of the rating, 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: Jakob Suwalski.
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director.
The ratings /outlook were first assigned by Scope on 13 November 2015. The ratings/outlooks were last updated on 12 July 2019

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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