DBRS Morningstar Assigns AA (high) Rating to the French City of Lyon, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) assigned a Long-Term Issuer Rating of AA (high) and a Short-Term Issuer Rating of R-1 (high) to the City of Lyon (Lyon). The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
Lyon's ratings are underpinned by (1) the city’s good financial performance and very moderate debt level; (2) the quality of its governance and fiscal management, which offers a high degree of financial transparency; (3) a sound, diversified and efficient debt structure and a comfortable liquidity situation; and (4) a diversified and growing economy which constitutes the second major economic hub of France. DBRS Morningstar also takes a positive view of the institutional framework in which Lyon operates, in particular the budgetary principles and procedures applicable to French sub-sovereign governments, which contribute to their financial sustainability. DBRS Morningstar also includes in its analysis the exceptional support from the Republic of France (rated AA (high), Stable) that French sub-sovereign governments have benefited from in the past, in particular, through the exceptional financing envelopes set up by Caisse des Dépôts from November 2008, when market conditions were unfavourable.

The Stable Trend reflects DBRS Morningstar's view that risks to the ratings are balanced. The city’s clear financial strategy and fiscal flexibility should enable it to implement its EUR 1.25 billion Multi-Year Investment Plan (“Investment Plan”), while maintaining a favourable budgetary profile and a moderate debt level. This is despite the current inflationary environment, particularly regarding energy prices.

RATING DRIVERS
The long-term rating could be upgraded if the Republic of France's ratings were upgraded.

The ratings could be downgraded if one or a combination of the following occur: (1) the Republic of France's ratings were downgraded; (2) a deterioration in the budgetary performance of the city, leading to a rapid and significant increase in the debt level.

RATING RATIONALE
Lyon Benefits from Its Good Governance and Fiscal Management as well as its High Budgetary Flexibility

The strategic objectives of the City of Lyon in terms of public policies have been clearly defined in the 2020-2026 Mandate Plan, with the ecological transition as the common thread of all policies. The implementation of this Mandate Plan is based on a EUR 1.25 billion Investment Plan. The financial framework of the mandate was validated by the Executive in September 2020 and is based on: (1) a target of achieving EUR 800 million of incurred expenditure related to the Investment Plan over the period 2021-2026; (2) a maximum allowed average annual growth of 2% for operating expenditure, of which 3% annually on average for staff expenditure. This budgetary strategy would lead the city to have a debt-to-operating surplus of less than 10x in 2026. DBRS Morningstar takes the view that the city should be able to meet this financial goal.

The city's governance and fiscal management are good. Lyon has set up a close surveillance of the execution of its Investment Plan, with dedicated monitoring committees and exhaustive annual project reviews, operation-by-operation. The city has prudent and detailed financial forecasts, which are updated at least twice a year. The city also benefits from tools allowing it to ensure close and continuous monitoring of financial execution throughout the year, with regular reporting at the level of the Executive and the Head of Administration.

The city's fiscal room for manoeuvre remains high and available to mitigate the potential impacts of external shocks on the sustainability of its financial trajectory. This is despite the abolition of the housing tax on principal residences as decided by the State. The property tax is the main revenue leeway and accounted for 54% of Lyon’s operating revenues in 2021. It is made of a resilient tax base, relatively immune to the economic cycle. Moreover, the city's property tax rate of 29.26% in 2022 is significantly lower than the national average for municipalities (37.72% in 2021). In addition, the city also has room for manoeuvre on fees, in particular parking fees.

Lyon’s Budgetary Performance is Strong and Its Debt Level Moderate

The city’s budgetary performance is good and has been relatively resilient during the COVID-19 pandemic. The operating surplus-to-operating revenues ratio stood at 13.4% in 2021, a favourable level. DBRS Morningstar believes that Lyon should be able to maintain the operating surplus-to-operating revenues ratio above 10% by 2024, despite the inflationary environment. The city's energy purchasing strategy should enable it to mitigate the fiscal impact of rising energy prices, at least in 2022 and 2023. DBRS Morningstar will also closely monitor the financial measures that will impact French sub-sovereign governments under the 2023 budget law, including the indexation of the cadastral value of the property tax.

In the last five years, the city has generated an average annual financing surplus of 2.1% of its operating revenues, with capital expenditure amounting to EUR 106.6 million per year on average. The gradual implementation of the Investment Plan with incurred capital expenditure expected to reach EUR 135 million annually by 2024 should lead the city to record financing deficits in the coming years, but they should remain moderate.

Since 2017, Lyon has been able to continuously reduce its debt stock and improve its debt ratios, except in 2020 because of the COVID-19 pandemic. At the end of 2021, Lyon’s adjusted debt-to-operating revenues and debt-to-operating surplus ratios were very favourable, standing at 55.9% and 4.2x respectively. These ratios are expected to deteriorate moderately over the next few years with the implementation of the Investment Plan but the adjusted debt-to-operating revenues and debt-to-operating surplus ratios would remain at favourable levels, respectively below 60% and 6x by 2024.

Lyon Enjoys Efficient Debt Management and a Comfortable Liquidity Situation

The city’s debt structure is plain vanilla and efficient. Its exposure to the rise in interest rates is limited: as of December 31, 2021, 77% of the debt was fixed rate, after hedging. The average debt interest rate is low at 0.99% at end-2021. The city's diversified and optimized debt management allows it to contain its net interest expenses at a very low level, accounting for less than 0.7% of operating revenues over the last 3 years and likely to remain below 1% of operating revenues by 2024.

The city's liquidity management is prudent and diversified. The cash position of Lyon is comfortable with an average cash balance of EUR 55.2 million between January 1, 2022 and August 31, 2022. In addition, the city currently has three liquidity lines for a total amount of EUR 80 million, two revolving loans for a total ceiling of EUR 1.3 million in 2023 and a commercial paper “NEU CP” program of EUR 150 million. Due to the city's excess cash position, available liquidity instruments were not used in 2022. Nevertheless, DBRS Morningstar notes that Lyon has in the past been able to use its NEU CP program with favorable financial terms, at times even benefiting from negative interest rates.

The city’s internal procedures for monitoring contingent liabilities are effective. Lyon is the majority shareholder of two social and affordable housing providers, Société Anonyme de Construction de la Ville de Lyon (SACVL) and Société Anonyme d'Habitations à Loyer Modéré pour l'Action Sociale (SAHLMAS). DBRS Morningstar considers that SACVL and SAHLMAS have a solid financial profile as of end-2021.

Lyon is the Second Major Economic Hub of France

With a population of 522,969 inhabitants in 2019, Lyon is the third municipality in France in terms of population. It is the city-centre of the Metropolis of Lyon which includes 59 municipalities and is the second economic hub of France after the Paris metropolitan area. The City of Lyon accounts for 37% of the inhabitants of the Metropolis of Lyon but includes 45% of its employees. Lyon's population is comparatively wealthier than the national average and benefits from an unemployment rate that is structurally slightly lower.

Lyon's economy is diversified, although mainly focused on business services and services to individuals. While the industry now accounts for only 7% of jobs in Lyon, it stands out for its dynamism, particularly in the fields of health and life sciences. In the field of health, the construction underway of the World Health Organization’s academy, which could gather 16,000 students, should strengthen Lyon's place as a global health hub.

DBRS Morningstar believes that Lyon's economy will continue to grow at a pace close to the French economy as a whole, while showing a slightly stronger resilience to potential external shocks than the national average, as was the case when the economic impacts of the Covid-19 pandemic were most significant in 2020.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

RATING COMMITTEE SUMMARY

DBRS Morningstar’s European Sub-Sovereign Scorecard generates a result in the AAA – AA range. The main points discussed during the Rating Committee include the city’s economic structure, its financial performance and debt metrics, its debt and liquidity profile, its overall governance, and the likelihood of support from the national government, if ever needed.

For more information on the Key Indicators used for the Republic of France, please see the Sovereign Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/403327/france-republic-of-scorecard-indicators-and-building-block-assessments.

The national scorecard indicators were used for the sovereign rating. The Republic of France’s rating was an input to the credit analysis of the City of Lyon.

Notes:
All figures are in euro (EUR) unless otherwise noted.

The principal methodology is the Rating European Sub-Sovereign Governments (August 12, 2022) https://www.dbrsmorningstar.com/research/401273/rating-european-sub-sovereign-governments. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

The sources of information used for this rating include the City of Lyon for the 2017-2021 financial statements, 2021 and 2022 budgets, 2020-2026 Mandate Plan, financial forecasts, multi-year investment plan, debt and liquidity situation, city-owned entities accounts for 2021, municipal information report on major risks (DICRIM), Observatory of Local Finance and Public Management (OFGL), National Institute of Statistics and Economic Studies (INSEE), EUROSTAT, Urban Planning Agency of the Lyon Metropolitan Area (UrbaLyon), Minister of Economy, Finance and Industrial and Digital Sovereignty. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at https://www.dbrsmorningstar.com/research/403722.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mehdi Fadli, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Co-Head Global Sovereign Ratings
Initial Rating Date: October 7, 2022
Last Rating Date: Not applicable as there is no last rating date.

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