OREANDA-NEWS. Fitch Ratings has affirmed Caisse d'Amortissement de la Dette Sociale's (CADES) Long-Term Issuer Default Rating (IDR) and local currency Long-Term IDR at 'AA' and Short-Term IDR at 'F1+'. The Outlook is Stable, mirroring that on France's sovereign IDR (AA/Stable/F1+; last affirmed on 10 June 2016). A full list of rating actions is at the end of this comment.

The affirmation reflects the unchanged link between CADES and the French state since our last review, including a strong probability of extraordinary support from the state given CADES' status as public agency (Etablissement public national a caractere administratif; EPA) and its strategic importance to the country. This status reflects the French state's ultimate responsibility for CADES' solvency and liquidity, together with its strong monitoring and control. CADES' ratings also factor in its reliable revenue sources and sound debt and liquidity management.

KEY RATING DRIVERS

Legal Status (Stronger)

Thanks to its EPA status, CADES would benefit from very strong state extraordinary support in case of need as the French state is ultimately responsible for CADES's solvency and liquidity. As a purely administrative body in charge of a mandatory social responsibility, CADES is not subject to EU regulation on state aid. There is no threat of any pressure on CADES' status or any risk of the state's support being qualified or considered as an unlawful state aid.

Strategic Importance (Stronger)

CADES is a specialised state agency whose objective is to refinance and amortise, through an ad-hoc structure, debt arising from accumulated past deficits of France's social security system.

Integration (Stronger)

All of CADES's debt is consolidated in France's general government debt, of which it represented 6% at end-2015. CADES is also strongly integrated with the French government as every year, the social security financing bill voted by parliament sets an objective for CADES' annual debt amortisation.

Control (Stronger)

CADES is a social security agency and it is tightly controlled by the French state. It is supervised jointly by the Minister of Economy, the Minister of Finance and by the three ministers in charge of social security who appoint the agency's directors and closely monitor CADES' operations. The French state appoints the majority of CADES's board members, approves budgets and strategic decisions, and strictly monitors its funding.

Operations

CADES' solvency is strongly underpinned by its revenue structure. A recurrent tax (CRDS), paid on almost all types of revenue, is specifically earmarked for CADES' debt amortisation. Since 2009, CADES also receives a share of the CSG, another activity-related tax. According to a 2005 organic law, any new debt transfers to CADES from the French state have to be offset by sufficient new resources. Consequently, and to compensate the significant debt transfer which took place in 2011, financing to CADES was increased through the annual transfer of EUR2.1bn from the reserve fund for retirees since that year. In 2016, the CSG rate was increased to 0.60% (from 0.48%) in compensation for the abolition of the tax that CADES had levied, until 2016, on capital and investments.

Since its inception in 1996, CADES has taken additional debt transfers from the French social security system several times. There was a major transfer in 2011 when CADES assumed EUR62bn of new debt. In 2015, CADES assumed an additional EUR10bn debt and it will take over EUR23.6bn new debt in 2016. At end-2015, CADES' net debt was EUR126.7bn and the entity amortised EUR13.5bn during that year. According to the 2016 social security financing bill, CADES will amortise EUR14.2bn in 2016. Fitch estimates CADES's net debt outstanding will amount to EUR136bn at end-2016.

CADES faces liquidity risk due to its activities. This is mitigated by the diversity and quality of the agency's short-term funding programmes as well as sufficient back-up lines and liquidity facilities. In the event of a liquidity shortfall, thanks to its status, CADES would have immediate access to state liquidity support mechanisms.

CADES's liquidity, counterparty, debt risk management processes and contingency policies show a high level of security and all significant decisions are closely monitored by the French state. CADES is able to tightly monitor its medium - and long-term debt repayment targets through a varied set of interest rates, inflation and revenue growth scenarios.

RATING SENSITIVITIES

Any action on France's sovereign ratings would be reflected by CADES' ratings.

Although unlikely, an adverse change in CADES' legal framework could also trigger a downgrade.

The rating actions are as follows:

- Long-Term IDR: affirmed at 'AA', Outlook Stable

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

- Commercial paper programmes (French BT, ECP and USCP): affirmed at 'F1+'

- Senior unsecured BMTN programme: affirmed at 'AA'

- Senior unsecured debt issuance programmes (Long-Term): affirmed at 'AA'

- Senior unsecured debt issuance programmes (Short-Term): affirmed at 'F1+'