OREANDA-NEWS. Fitch Affirms Ile-de-France at 'AA'; Outlook Stable Fitch Ratings has affirmed the Region of Ile-de-France's (IDF) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AA' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F1+'. A full list of rating actions is available at the end of this commentary.

The affirmation reflects the region's unchanged scenario of sound fiscal performance and outstanding economic profile. The Stable Outlooks reflect our expectations that IDF has sufficient financial flexibility to maintain its sound self-financing capacity before debt repayment (SFC; current balance plus capital revenue) despite expected slight deterioration in its financial metrics over the medium term.

KEY RATING DRIVERS

The ratings are based on IDF's sound operating performance, strong governance, a strong capacity to self-finance sizeable capex and sound debt coverage ratios. They also reflect the region's outstanding economic position in France and strong-socio economic indicators relative to peers. On the other hand, the ratings also take into account IDF's fairly high debt levels.

IDF is France's (AA/Stable/F1+) main political and economic centre. It hosts 18.2% of the national population, its economy accounts for 31% of France's GDP and, in 2014 its GDP per capita was 66% above France's and 78% above the EU average, the eighth-highest among EU regions. The region benefits from a large, well-qualified workforce and high-quality infrastructure. The region's resilient economy helped contain unemployment at 8.8% in 4Q15, below the national average of 10%. Sound socio-economic wealth indicators provide revenue flexibility as Fitch expects IDF's tax base growth to offset limited tax-raising leeway.

IDF's current margin has been healthy, averaging 21.2% per year since 2012. According to Fitch's base case scenario, IDF will continue to post a sound current margin close to 19% in 2016-2018. This is despite sharp cuts (12% nominally in 2016) in state grants, IDF's contribution of the corporate value added levy to the regional equalisation fund (2% of expected operating revenue in 2016) and hefty statutory transfers to Syndicat des Transports d'Ile-de-France (STIF), the region's main satellite company.

Ver the medium-term, the dynamism of the new region's operating revenue would be affected

By the lack of tax leeway and expected cuts in state transfers. Nevertheless, with operating

Expenditure restraint, the new region's current margin should remain in line with the current

Ratings (compared with an expected sound 26.8% at end-2015 for Midi-Pyrenees)

Ver the medium-term, the dynamism of the new region's operating revenue would be affected

By the lack of tax leeway and expected cuts in state transfers. Nevertheless, with operating

Expenditure restraint, the new region's current margin should remain in line with the current

Ratings (compared with an expected sound 26.8% at end-2015 for Midi-Pyrenees)

Over the medium term, Fitch expects the cuts in state transfers to be offset by the dynamism of certain taxes such as the levy on corporate value added and by operating expenditure restraint, including a thorough streamlining of IDF's satellites costs. Of a total EUR2.6bn operating spending in 2015, Fitch estimates 20% to have been related to discretionary expenditure.

Fitch expects capital expenditure to remain high in the medium term, given the region's plans to finance a number of infrastructure projects, notably in transport. Fitch estimates that SFC (before debt repayment) will remain high at above 75% of capital expenditure in 2018. IDF's SFC is underpinned by additional capital grants of EUR140m per year that the region is entitled to collect from the central government from 2015 onwards to finance certain heavy investments under the "New Grand Paris" project. IDF's capex will also largely be co-financed by the state under the 2015-2020 long-term state/region co-financing programme amounting to EUR7.3bn. The state will contribute EUR2.9bn and the region EUR4.4bn.

IDF's direct debt at end-2015 - mostly bonds - was EUR5.86bn, including EUR500m outstanding short-term debt in the form of Billets de Tresorerie (BT, French commercial paper). Direct debt accounted for 8.2 years of the region's current balance at end-2015, while operating margin covered interest payments by around 6x.

Fitch forecasts the debt payback ratio to slightly deteriorate to about 10 years by 2018, from eight years in 2016. Liquidity is underpinned by predictable cash flows and diverse credit lines. IDF's liquidity management policy includes a EUR1bn BT programme. Fitch believes IDF has sufficient available bank and revolving credit lines to cover the liquidity needs associated with increased use of its BT programme.

STIF's debt is expected to increase significantly, to around EUR1.8bn at end-2016, from EUR1bn in 2015. In Fitch's view, STIF has a sound risk profile as it is self-supporting, and largely funded by dedicated tax revenue as well as by statutory contributions from IDF (51% of total) and from other local governments. Fitch expects growth in STIF's fare revenue and the optimisation of the company's contracts with regional transportation operators to absorb the shortfall stemming from the unification of transportation tariff measures implemented in September 2015.

Fitch views IDF's financial management as sophisticated and prudent, particularly in terms of the region's forecasting ability, which allows IDF to control its annual budget and debt commitments. Debt and liquidity management is conservative.

RATING SENSITIVITIES

A current margin consistently below 15% leading to a debt payback ratio consistently above 10 years would be negative for IDF's ratings. A downgrade of the sovereign would also be reflected in IDF's ratings.

An upgrade of IDF's ratings could occur if IDF's budgetary performance is in line with Fitch's expectations and net overall risk is consistently below 200% of current revenue (2015: 184%), provided France's ratings are also upgraded.

The rating actions are as follows:

- Long-Term Foreign and Local Currency IDRs: affirmed at 'AA'; Outlook Stable

- Short-Term Foreign Currency IDR: affirmed at 'F1+'

- EUR7bn EMTN programme: affirmed at 'AA'/'F1+'

- EUR1bn BT programme: affirmed at 'F1+'

- Senior unsecured notes: affirmed at 'AA'.