OREANDA-NEWS. September 15, 2015.  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 available at the end of this commentary.

The affirmation reflects the region's strong economic profile and track record of sound operating performance. The affirmation also takes into account our expectation of a slightly declining current margin in 2015-2018 and an increasing debt burden. The Stable Outlooks reflect our expectations that IDF has sufficient financial flexibility to maintain a sound self-financing capacity (SFC; current balance plus capital revenue) despite a forecast small deterioration in its financial metrics over the medium term and that the territorial reforms to be implemented following the recently passed laws will not affect significantly the region's budget.

KEY RATING DRIVERS

The ratings reflect IDF's robust budgetary margins, its strong capacity to self-finance sizeable capex, its sound debt coverage ratios but also its fairly high debt levels. They also take into account the region's strong socio-economic profile and prudent financial management.

IDF is France's main political and economic centre. It hosts 19% of the national population, its economy accounts for 31% of France's GDP and, in 2013 its GDP per capita was 64% above France's and 75% above the EU average, the eighth-highest among EU regions. The region benefits from a large, well-qualified workforce and high-quality infrastructure. Although the region mirrors national trends, its resilient economy allowed unemployment to be contained at 8.8% in 2Q15, below the national average of 10%.

IDF's current margin has been healthy, averaging 22.5% per year since 2010. According to Fitch's base case scenario, IDF will continue to post a sound current margin of around 20% in 2018 despite sharp cuts in state grants, IDF's contribution to the regional equalisation fund and expected increased transfers from IDF to Syndicat des Transports d'Ile-de-France (STIF), its main satellite, to compensate STIF's revenue loss resulting from the unification of transportation tariffs measure effective from September 2015.

Over 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 by strong control of operating expenditures, notably through continued trade-off between different budget spending items. Of a total EUR2.6bn operating spending in 2014, Fitch estimates 20% to have been related to discretionary expenditure.

Despite a high level of planned investment at EUR1.6bn on average per year until 2018, given the region's plans to finance a number of infrastructure, notably transport projects, Fitch estimates that SFC will remain high at 82% of capital expenditure in 2018. IDF's SFC will be underpinned by additional capital revenue of EUR140m per year that the central government has entitled IDF to collect from 2015 onwards to finance certain heavy 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 amounting to EUR7.3bn. The state will contribute EUR2.9bn and the region EUR4.4bn.

At end-2014, direct debt, including EUR250m short-term debt, accounted for 7.4 years of the current balance, while the operating margin covered interest paid by 6x. Fitch forecasts the debt payback ratio will slightly deteriorate to 9.6 years by 2018 from 8.6 years in 2015. Short-term liquidity needs are soundly covered.

STIF's debt is expected to increase significantly, to around EUR1bn in the medium term, from EUR511m in 2014. In Fitch's view, STIF has a sound risk profile as it is self-supporting, and largely funded by dynamic earmarked tax revenue as well as 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

An operating margin consistently below 20% leading to a debt payback ratio consistently above 10 years would be negative for IDF's ratings. A downgrade of the sovereign would also be reflected in IDF's ratings.

An upgrade of IDF's ratings could occur if IDF's budgetary performance is in line with Fitch's expectations and direct risk is consistently below 200% of current revenue, assuming France's ratings are upgraded.

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'.