OREANDA-NEWS. December 15, 2015. Fitch Ratings has affirmed the International Finance Facility for Immunisation's (IFFIm) Long-term Issuer Default Rating (IDR) at 'AA' with a Stable Outlook. The Short-term IDR has been affirmed at 'F1+'. Its senior unsecured notes are also affirmed at 'AA'.

The ratings reflect support from IFFIm's donors and in particular the UK and France.

KEY RATING DRIVERS
The affirmation reflects the following key rating drivers:

IFFIm is a supranational entity established in 2006 to fund immunisation for children in 52 countries eligible for funds from Gavi, the Vaccine Alliance, a global health public-private partnership. Funds raised on financial markets by IFFIm are disbursed as grants to Gavi. Ratings are driven by pledges from donors to disburse grants and repay IFFIm's debt, and particularly by commitments by the UK (AA+/Stable, 53.6% of pledges at end-June 2015) and France (AA/Stable, 26.3%).

IFFIm's donors are the UK, France, Italy (BBB+/Stable), Australia (AAA/Stable), Norway (AAA/Stable), Spain (BBB+/Stable), the Netherlands (AAA/Stable), Sweden (AAA/Stable) and South Africa (BBB-/Stable). Donors' commitments are legally binding, and repudiation of their pledges would entail severe reputational damage and legal proceedings. The present value of outstanding pledges amounted to USD2.9bn at end-June 2015.

Default of donors on the timely payment of their pledges is the main source of risk. Although credit risk was improved by the upgrade of Spain to 'BBB+' in April 2014, IFFIm was downgraded along with France in December 2014. There were short technical payment delays by Sweden and Australia in 2015, but these were swiftly rectified. Grants are made in local currency of the donors, and hedged against FX risk through a swap agreement with the International Bank for Reconstruction and Development (IBRD, AAA/Stable).

Credit risk also arises from beneficiary countries: donors have the right to reduce their payments by a predefined percentage if one of the beneficiary countries is in protracted arrears with the IMF. At end-October 2015, grant disbursements to IFFIm were 2.5% lower than scheduled due to Zimbabwe, Somalia and Sudan being in default to the IMF. The risk of IFFIm failing to repay part of its bonds because of this reduction is limited by the liquidity buffer and gearing ratio limit it maintains.

IFFIm has committed to maintaining a ratio of net debt (outstanding bonds minus funds placed in a trust) to net present value of pledges (the gearing ratio) below a defined limit reviewed on a quarterly basis. The gearing ratio limit takes into account the credit risk associated with donors and beneficiary countries. At end- September 2015, the gearing ratio was 35.9% against a defined limit of 70.4%.

In addition, a 12 percentage-point buffer on the limit was introduced in 2013, effectively capping the limit at 57.3% at end-2014. This debt ceiling, which Fitch considers conservative, ensures that IFFIm can honour its debt service even in case of a reduction or delay in the pledge payments by donor countries.

Liquidity risk is limited due to IFFIm's strict compliance with its liquidity policy (liquid assets must cover debt service over the next 12 months) and conservative risk management. Liquidity and credit risk arising from the investment portfolio are managed effectively by the IBRD, IFFIm's designated treasury manager.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are evenly balanced. However, the following developments could result in a rating action:
- IFFIm's ratings and Outlook would be reviewed if the ratings and Outlooks of the UK or France are changed, due to their weight in donors' pledges.
- Material delays of grant disbursements by donor countries would also exert pressure on the ratings.
- Over the medium term, a breach by IFFIm of its gearing ratio limit related to rising debt or reduced net present value of pledges following an increase in the credit risk of recipient countries or donors could trigger a rating downgrade.

KEY ASSUMPTIONS
Fitch assumes that the relative weight of donor countries in total pledged grants will remain broadly unchanged.