OREANDA-NEWS. July 13, 2015 Fitch Ratings has upgraded Societe Nationale Immobiliere's (SNI) Long-term foreign and local currency Issuer Default Ratings (IDR) to 'AA-' from 'A+'. Its Short-term foreign currency IDR has been affirmed 'F1+'. The Outlook is Stable.

Fitch only rates SNI's consolidated division, which focuses on intermediate housing and excludes the pure social housing division comprising social housing entities. The consolidated division and the social housing division represent 30% and 70 %, respectively, of SNI total group stock.

KEY RATING DRIVERS
The upgrade reflects the strengthening of control from SNI's sponsor, Caisse des Depots et Consignations (CDC; AA/Stable/F1+). It also reflects SNI's more prominent role within the French state's (AA/Stable/F1+) stimulus programme for intermediate housing (SNI's main activity). Fitch uses a top-down approach under its 'Rating of Public Sector Entities-Outside the US' criteria to rate SNI. SNI's ratings are notched down by one level from those of its sponsor.

The upgrade reflects the following rating drivers and their relative weights:

HIGH
CDC applies its prudential model to SNI, implying tight control by CDC. This involves detailed reporting to CDC on a quarterly basis on debt and liquidity. Most of the members of SNI's supervisory board are currently CDC's representatives. Since 2014, the link with CDC has been reinforced, with CDC's CEO (M. Lemas) acting as the chair of SNI's supervisory board.

Fully consolidated within CDC, SNI is a semi-public company 99.99% controlled by CDC. Social and Intermediate housing developments run by SNI are part of CDC's medium-term strategic plan. Every year, a letter is addressed to SNI by CDC's CEO defining the policy guidelines on strategic and financial objectives to be achieved.

As a general interest housing subsidiary of CDC, SNI is France's largest social landlord managing a portfolio of 271,316 units. Over 2015-2019, 62,000 units are planned for production, 13,000 of which are under the state stimulus package. In 2014, SNI created the first French fund dedicated to the intermediate housing sector (Intermediate Housing Fund). This fund is managed through AMPERE Gestion, which is 19.17 % owned at by SNI after the second issue closing in June 2015, raising equity to EUR1.045bn from EUR500m and an investment capacity of about 10,00 units. Although intermediate housing - SNI's main activity - does not benefit from the same institutional support as social housing, SNI is tightly bound to the broader public sector, as most of its intermediate housing units are rented through housing reservation agreements or to the state's civil servants.

As a shareholder, CDC receives dividends from SNI. In 2013 and 2014, CDC has waived EUR150m payment of dividends and will reduce the distribution rate thereafter. In order to support SNI's investment plan, CDC will increase SNI's equity by EUR900m. Fitch believes that in case of need, CDC would be able to provide SNI with further support to the assistance it has given so far.

MEDIUM
Fitch expects SNI's consolidated division net result and cash flow will remain comfortable at about EUR90m and EUR200m, respectively, in 2018. At end-2014, SNI's consolidated division posted a sound budgetary performance with an interest cover ratio (operating result to interest expenditures) at 1.62x. At end-2014, SNI's consolidated division reached a positive net result at EUR113.7m compared with EUR273.8m at the group level.

In 2018, SNI expects to respect the gearing (net debt on equity) as set out in CDC's financial objectives (below 2x), with net debt of EUR2.6bn. At end-2014, SNI's consolidated division net debt remained stable at EUR2.9bn, with gearing at 1.7. This high level of debt is partly offset by a sound loan-to-value ratio stable at 44%. In term of liquidity, SNI benefits from predictable cash flow due to the recurring nature of its rental business mainly related to the public sector.

RATING SENSITIVITIES
A rating action on CDC would lead to a similar action on SNI. A weakening of the state's institutional and financial support to the affordable housing sector - which Fitch considers unlikely at present - may result in negative rating action.