OREANDA-NEWS. 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 at the end of this commentary.

KEY RATING DRIVERS
The ratings reflect IDF's robust budgetary margins, its strong capacity to self-finance sizeable capex, its fairly high debt levels and its sound debt coverage ratios. They also take into account the region's strong socio-economic profile and prudent financial management. The Stable Outlook reflects our opinion that IDF has sufficient financial flexibility to offset growing budgetary pressure and maintain a sound self-financing capacity (SFC; current balance plus capital revenue).

IDF is France's main political, administrative and economic centre. It hosts 19% of the national population, its economy accounts for 31% of France's GDP and, in 2012 its GDP per capita was 65% above France's and around 82% above EU averages, the fifth-highest among EU regions. The region benefits from a large, well-qualified workforce and high-quality infrastructure. Although mirroring the national trends, its resilient economy allowed the region to contain its unemployment rate at 8.8% in 3Q14, below the national average of 9.9%.

IDF's operating margin has been consistently healthy, averaging 26.4% per year since 2010. Fitch expects the operating margin to decrease below 23% over the medium term, mainly due to sharp cuts in state grants and, to a lesser extent, IDF's contribution to the regional equalisation fund. In the medium term, the cuts in state transfers should be offset by the dynamism of certain taxes such as the levy on corporate value added and the new office creation fee and strong control of operating expenditures, notably through continued trade-off between different budget spending items. Of an estimated total EUR2.6bn operating spending in 2014, Fitch estimates 20% related to discretionary expenditure.

Despite a high level of investment at EUR1.6bn on average per year until 2017, as the region plans to finance a number of infrastructure projects, notably transport programmes, Fitch estimates the SFC will remain high at 82.5% of capital expenditure in 2017. Combined with a limited decline in the current balance, the SFC should be underpinned by additional capital revenue of EUR140m per year that the central government has entitled IDF to collect from 2015 onwards in order to finance some hefty investments within the "New Grand Paris" project. IDF's capex will be largely co-financed by the state under the 2015-2020 long-term state/region co-financing programme, which will amount to EUR7.3bn overall and to which the state will contribute EUR2.9bn.

At end-2014, Fitch estimates direct debt, including EUR250m short-term debt, accounted for 7.1 years of the current balance, while the operating margin covered interest paid by 6.2x. Fitch forecasts the debt payback ratio will narrow to nine years by 2017. IDF has strong access to capital markets, by frequently tapping its EUR6bn EMTN programme. IDF's debt does not include any high-risk products.

Short-term liquidity needs are covered by a EUR724m available revolving credit line and a EUR1bn commercial paper (billet de tresorerie) programme. IDF's main satellite is Syndicat des Transports d'Ile-de-France (STIF), the regional transport authority. STIF's debt is expected to increase significantly, hovering around EUR1bn in the medium term, from EUR531.3m in 2014 as the Greater Paris area transportation capital enhancement programme increases. In Fitch's view, STIF has a sound risk profile as it is self-supporting, largely funded by dynamic earmarked tax revenue and by statutory contributions from IDF (51% of total) and other local governments.

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

RATING SENSITIVITIES
A consistent decline in the operating margin leading to a lower SCF than projected, associated with a debt payback ratio consistently exceeding 10 years would be negative for IDF's ratings. A downgrade of the sovereign would also be reflected by IDF's ratings.

An upgrade of the sovereign could be mirrored by IDF's ratings, provided the region maintains its strong budgetary performance and sound debt coverage ratios.

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+'
- EUR6bn EMTN programme: affirmed at 'AA'/'F1+'
- EUR1bn BT programme: affirmed at 'F1+'
- Senior unsecured notes: affirmed at 'AA'.