OREANDA-NEWS. Fitch Ratings has affirmed Societe de Financement Local (SFIL) Long-term local and foreign currency Issuer Default Ratings (IDR) at 'AA-' and its Short-term foreign currency IDR at 'F1+'. The Outlooks are Stable.

The affirmation reflects the unchanged links between SFIL and the French state (AA/Stable/F1+) since our last review, including no change in our expectations of strong extraordinary support from the state and the strategic importance SFIL has for the French state.

KEY RATING DRIVERS
SFIL is credit-linked to France under Fitch's 'Rating of Public Sector Entities - Outside the United States' criteria top down-approach. This is in light of the strong likelihood of extraordinary support for SFIL from the French state as its majority and reference shareholder (75% of capital) and SFIL's importance as a key funding source for the French public sector. The Stable Outlook mirrors that on France's ratings.

The European Commission (EC) considers SFIL to be a development bank as it addresses the funding needs of the French local public sector. This status allows direct state capital intervention under European state aid regulations. Fitch believes it is highly likely that the state would provide the necessary support to prevent a resolution of SFIL within the BRRD context. In addition, given the political and economic importance of French local authorities, Fitch believes SFIL is a strategic state asset.

Fitch considers that the state is the only entity able and willing to ensure SFIL's business model viability and its capital needs, notably to cover potential losses stemming from Caisse Francaise de Financement Local's (CAFFIL) existing loan portfolio. We therefore consider SFIL a credit-linked entity with the state -its sponsor- but notch its ratings down from its sponsor as there is no first-demand guarantee and also to reflect timeliness issues related to potential support. The ratings apply solely to SFIL as CAFFIL's covered bonds issuances are rated separately by Fitch.

SFIL is restructuring the portfolio of structured loans included in CAFFIL's cover pool, having reduced it by EUR1.3bn in 2014 to EUR6.3bn. SFIL benefits from the help provided by the state in favour of local authorities through a national support fund aimed at compensating local authorities for part of the loans' restructuring costs the amount of which has doubled in 2015 in particular to address the end of the peg of the Swiss franc to the euro.

In 2015, SFIL has been entrusted by the government with a new mandate to provide long-term export financing 100% insured by COFACE (A/Stable/F1) on behalf of the central government. This new activity has been judged by the EC as compliant with the state aid rules. Fitch considers this scope extension will enhance SFIL's strategic importance for the state and that it is likely to improve SFIL's currently low profitability.

In 2014, EUR4.2bn (25% market share) of loans to local authorities were originated by SFIL or through SFIL's partnership with La Banque Postale (LBP; A-/Stable/F1). SFIL's loans must comply with terms agreed with the EC, notably on pricing. The credit quality of SFIL's loan portfolio is strong as non-performing loans accounted for only 0.7% of total gross loans at end-2014.

SFIL's CET1 capital ratio, consolidated with CAFFIL, was 22.9% at end-2014. It was only marginally affected by SFIL's net loss (of EUR34m). SFIL's funding is based on a EUR12.5bn credit line from shareholder Caisse des Depots et Consignations (AA/Stable/F1+) and a EUR1.1bn credit line from LBP. Around EUR42.6bn of CAFFIL's assets are eligible for central bank repo.

RATING SENSITIVITIES
The ratings could be downgraded if there is a perceived weakening of potential state support. A downgrade of France would also be reflected by SFIL's ratings.

The ratings could be upgraded if the state provides an unconditional, first-demand guarantee on SFIL's liabilities. SFIL's ratings would also be upgraded if France was upgraded.