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.

KEY RATING DRIVERS
Fitch rates FNSP according to its public sector entity methodology applying a bottom-up approach. The affirmation reflects FNSP's national and international academic excellence, its unique position in the French academia leading to sustained student demand. The ratings also factor in the strong support from central government, although the multi-year agreement (restated in 2014) no longer ensures dynamic state grants, the satisfactory financial performance and the flexibility on own resources that should compensate for stabilising public funding as well as Fitch's expectations of an increase in debt in the medium term.

Although FNSP remains highly dependent on financial support from the central government, the share of revenue it receives has fallen to 48% in 2014 from 58% in 2008. However, its own resources have grown more dynamically and are now exceeding state funding (52% in 2014). The current multi-year agreement, signed with the state in 2014, ceases to index grants dynamically and state funding (excluding teachers' salaries paid by the state) will therefore stabilise in the medium term. Consequently, FNSP aims at pursuing revenue diversification, particularly vocational training, sponsorship and donations. Fitch also considers the significant share of tuition fees (28% of operating revenue in 2014) 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.

Like the French higher education sector as a whole, FNSP's expenditure is rather rigid. Salaries accounted for 54% of operating expenditure in 2014. However, tighter control over spending is to be implemented, which should maintain operating spending growth at around 3.2% per year in the medium term. FNSP is a not-for-profit organisation and consequently has low current margins. In the medium term, the net operating result should stabilise at around EUR2.3m per year, or 1.2% of operating margin.

By the end of 2015 FNSP could conclude a large acquisition project, with the over-the-counter purchase of the "Hotel de l'Artillerie" building currently held by the French Ministry of Defence in Paris. The overall cost is estimated at EUR186m. If completed, this should help FNSP to achieve its real estate rationalisation policy, gathering in a single, larger place most of its Parisian campus, which is currently based over several premises across the city. It would also help solving the problem of limited capacities, regarding student population (currently capped around 13,500), teaching and research output and student housing, and, as such, may help FNSP catch up with its international competitors.

According to FNSP's estimates, the service of the debt to be incurred would be more than covered by saving made on rentals and pooling between services, economies of scale, and additional resources. When, this investment project materialises, Fitch will reassess its impact on FNSP's overall credit profile once updated financial data is available.

Total financial debt accounted for EUR55.4m at year-end 2014 (31% of operating revenue) and should decline to EUR53.2m at year-end 2015. However, if the Artillerie acquisition goes ahead, it could lead to debt exceeding 70% of operating revenue by 2016.

Liquidity is ensured by large cash reserves (EUR46m at year-end 2014, from EUR32m in 2013), which represented 11.4x debt service falling within 12 months, and access to EUR4m 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 (for instance, below 50% of operating revenue).