OREANDA-NEWS. Fitch Ratings has affirmed France-based Unedic's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with Stable Outlooks and Short-term foreign currency rating at 'F1+'.

Unedic's EUR31bn euro medium-term note (EMTN) programme has also been affirmed at 'AA' and 'F1+', and the senior unsecured notes at 'AA'. Its EUR12bn billets de tresorerie (BT) programme has been affirmed at 'F1+' and EUR5bn medium term notes (BMTN) at 'AA'.

KEY RATING DRIVERS
The affirmation reflects the unchanged strong links between Unedic and the French state (AA/Stable) over the past 12 months.

The ratings are credit-linked and aligned with those of the French state, based on a topdown rating approach under Fitch's Public Sector Entities outside the United States criteria. The ratings reflect Unedic's mission as the sole manager of the French unemployment insurance system (UIS) under state delegation. They are underpinned by the French Labour Code regulating its financial stability, and by support from the government through its approval of the unemployment insurance agreement, renegotiated every two years.

The UIS, the agreements signed between the social partners and the approval by the state are mandatory under the French Labour Code. This agreement sets the contribution rates of employers and employees affiliated to Unedic. The current agreement covers 2014-2016.

The state does not exercise formal control but supervises Unedic's management through the presence of a state comptroller in Unedic's governance institutions and through its approval of the unemployment insurance agreement. In the absence of approval of the insurance agreement, the state will be responsible for Unedic's debt repayment.

Unedic's performance is very sensitive to the economic cycle and has to be viewed in light of its non-for-profit mission and counter-cyclical role as an economic and social buffer. In 2014, the sluggish economy led to moderate growth of the French private sector payroll (1.5%), which is the basis of unemployment contributions. Amid still growing unemployment, insurance allocations rose 1.4% with 2.5 million people on unemployment benefits. The deficit in the UIS remained close to that of 2013, at EUR3.7bn. Over the medium term, Unedic projects a progressive recovery (GDP to grow 1.1% in 2015, 1.6% in 2016). The deficit may deteriorate to EUR4.6bn in 2015, as part of the 2015 contributions were paid in advance in December 2014, before narrowing somewhat to EUR3.5bn as unemployment is likely to recede slightly.

Since 2009, the insufficient coverage of unemployment benefits by contributions paid by private sector employers and employees has caused Unedic's debt to rise to EUR21.8bn from EUR4.7bn in 2008. It is likely to reach EUR35bn in 2018 according to the latest projections from Unedic. At June 2015, 69.9% of the debt was long-term bonds, 15.4% commercial paper (CP) and 15% BMTN. Unedic had issued 50% of its EUR6bn targeted long-term funding for the current year.

Since 2011, Unedic has benefited from an explicit state guarantee of its long-term bond issues, under its EUR31bn EMTN programme. The 2015 guarantee is on an overall issued amount of EUR6bn. This covers the repayment of principal due in 2015, interest and fees. This guarantee exempts Unedic from the application of the article L.213-15 of the monetary code, which obliges the associations facing declining equity to restore it unless they lose the ability to raise bonds. As a marketable debt instrument, the BMTN issues do not fall under the scope of this legal provision, therefore the state guarantee has not been extended to the issuance under the EUR5bn BMTN programme launched in 2014. At end-June 2015, all the long-term bond issues from Unedic (EUR18.8bn) benefited from the explicit state guarantee.

The EUR12bn CP programme is secured by back-up lines corresponding to 15 days of either total expenditure or CP repayments with a sufficient liquidity buffer of a minimum of EUR2bn. In case of adverse market conditions, Fitch believes that this buffer would be sufficient to meet immediate liquidity demands before the state steps in to provide financial support to Unedic. Fitch believes that support would be forthcoming in view of Unedic's strategic importance.

RATING SENSITIVITIES
Any rating action on the sovereign's ratings would be reflected by Unedic's ratings. A significant unfavourable change to UIS's characteristics would also prompt a downgrade. A downgrade could also result from a weaker liquidity back-up package.