OREANDA-NEWS. Fitch Ratings has affirmed Fondation Nationale des Sciences Politiques' (FNSP) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook.

The affirmation reflects FNSP's national and international academic excellence and reputation, with its unique position in French academia leading to sustained student demand. The ratings also factor in the strong, stable financial support from central government, the satisfactory financial performance and the flexibility on own resources that should compensate stable public funding and a sharp increase in debt over the short and medium term.

KEY RATING DRIVERS

Fitch rates FNSP according to its public sector entity rating criteria. As an autonomous institution, we view FNSP as a non-credit-linked entity to France (AA/Stable/F1+). Fitch rates FNSP two notches higher than its standalone credit profile to reflect the regulatory support from and control by the French government.

FNSP remains highly dependent on financial support from the central government, but the share of revenue it receives (through a multi-year agreement, the current one covering 2014-2017) has consistently reduced, to 47% of its total in 2015, down from 56% in 2010 (including teachers' salaries paid directly by the state). Meanwhile, its own resources have grown more dynamically (8.4% yoy in 2010-2015). State funding has stabilised since 2013. Consequently, FNSP aims to pursue revenue diversification, particularly vocational training, sponsorship and donations.

Fitch also considers the significant share of tuition fees (about one-third of total revenue in 2015) as a positive factor. We expect student demand to remain robust in the medium term. In any one year, FNSP receives about five times more applications than available places. Fees remain low compared with major US and EU universities.

Although FNSP has financial autonomy and is diversifying its resources, the state oversight remains strong and is ensured through the government's appointment of FNSP's administrator and through ongoing monitoring of the four-year agreement.

Like the French higher education sector as a whole, FNSP's expenditure is rather rigid. Salaries accounted for 55% of operating expenditure in 2015. However, tighter control over spending is being implemented, which should maintain operating spending growth at below 4% per year in 2015-2019 (2011-2015: 4.3%). FNSP is a not-for-profit organisation and consequently has low current margins. In the medium term, we expect the net operating result will stabilise at around EUR2.4m per year, or 1.2% of operating margin (2015: 2.6%).

FNSP is finalising a large acquisition project, with the purchase of the "Hotel de l'Artillerie" building currently held by the French Ministry of Defence in Paris. The overall cost (including refurbishment and taxes) is estimated at EUR191m. The project has met the Prime Minister's agreement. This will help FNSP to achieve its real estate rationalisation policy, reducing its Parisian campus to seven premises, from currently 23 premises across the city. It will also help solve the problem of limited capacities and may help FNSP develop its teaching and research output and catch up with its international competitors.

Considering that over 80% of the project will be funded by debt, we expect long-term debt to grow sharply, from EUR53m in 2015 (29% of operating revenue) to around EUR120m in 2016 (above 60%) and to peak at EUR195m in 2021 (above 80%). The city of Paris (AA/Negative/F1+) is likely to explicitly guarantee 75% of the loans to be incurred. However, FNSP's long-term debt sustainability will remain closely linked to its ability to diversify its revenue base and maintain a sound budgetary performance. Therefore, Fitch will monitor FNSP's capacity to maintain its direct debt to operating revenue ratio to below 100%.

Liquidity is ensured by large cash reserves (EUR53m at year-end 2015, from EUR46m in 2014), which represented more than 15x debt service falling within 12 months, and access to EUR6m of committed bank lines (unused).

RATING SENSITIVITIES

FNSP's inability to offset the slight expected stabilisation or even a slight decline in state grants with a consistent increase in own resources could negatively impact the rating.

The inability to keep direct debt below 100% of operating revenue for more than two consecutive years could also lead to negative rating action.

Conversely, the rating could be upgraded if budgetary performance strengthened sustainably (including operating surplus/operating revenue ratio stabilising above 2% in the medium term), coupled with a consistent increase in the share of own resources, provided direct debt is moderate (below 50% of operating revenue).