OREANDA-NEWS. 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 unchanged scenario of sound fiscal performance and outstanding economic profile. The Stable Outlooks reflect our expectations that IDF has sufficient financial flexibility to maintain a sound self-financing capacity before debt repayment (SFC; current balance plus capital revenue) despite a forecast slight deterioration in its financial metrics over the medium term.

KEY RATING DRIVERS
The ratings are underpinned by IDF's track record of sound operating performance, its strong capacity to self-finance sizeable capex, its sound debt coverage ratios but also its fairly high debt levels. They also reflect the region's outstanding economic position in France, its strong-socio economic indicators relative to peers and the administration's strong management.

IDF is France's (AA/Stable/F1+) main political and economic centre. It hosts 18.5% of the national population, its economy accounts for around 30% of France's GDP and, in 2013 its GDP per capita (latest official data available) 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 helped contain unemployment at 9.1% in 3Q15, below the national average of 10.6%. Sound socio-economic wealth indicators provide revenue flexibility as Fitch expects tax base growth to offset limited rate-raising leeway.

IDF's current margin has been healthy, averaging 21% per year since 2012. According to Fitch's base case scenario, IDF will continue to post a sound current margin close to 20% in 2016-2018. This is despite sharp cuts (12% nominally in 2016) in state grants, IDF's contribution of the corporate value added levy to the regional equalisation fund (2% of expected operating revenue in 2016) and hefty statutory transfers to Syndicat des Transports d'Ile-de-France (STIF), its main satellite.

Over the medium term, Fitch expects the cuts in state transfers to be offset by the dynamism of certain taxes such as the levy on corporate value added and by operating expenditure restraint, including streamlining IDF's satellites costs and continued trade-off between IDF's different budget spending items. Of a total EUR2.6bn operating spending in 2015, Fitch estimates 20% to have been related to discretionary expenditure.

Despite a high level of planned investment in line with recent years, given the region's plans to finance a number of infrastructure projects, notably in transport, Fitch estimates that SFC (before debt repayment) will remain high at 82% of capital expenditure in 2018. IDF's SFC is underpinned by additional capital grants of EUR140m per year that IDF is entitled to collect from the central government from 2015 onwards to finance certain heavy investments under the "New Grand Paris" project. IDF's capex will also largely be 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.

Fitch estimates direct debt at end-2015 at EUR5.36bn, of which 79% were bonds, and at around 7.5 years of the current balance. The agency estimates the operating margin will cover interest payment by around 6x. Fitch forecasts the debt payback ratio will slightly deteriorate to 10 years by 2018 from eight years in 2016. Liquidity is underpinned by predictable cash flows and diverse credit lines. IDF's liquidity management policy includes a EUR1bn Billets de Tresorerie ('BT', French commercial paper) programme, under which it issued EUR500m in 4Q15. Fitch believes IDF has sufficient available bank and revolving credit lines to cover the liquidity needs associated with its larger use of its BT programme.

STIF's debt is expected to increase significantly, to around EUR1.4bn in 2016, from an estimated EUR1bn in 2015. In Fitch's view, STIF has a sound risk profile as it is self-supporting, and largely funded by dynamic dedicated tax revenue as well as by statutory contributions from IDF (51% of total) and from other local governments. Fitch expects growth in STIF's fare revenue and optimisation of its contracts with the regional transportation operators to absorb the shortfall stemming from the unification of transportation tariffs measure implemented in September 2015.

Fitch considers the region's financial management as sophisticated and prudent, 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
A current margin consistently below 15% 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 net overall risk is consistently below 200% of current revenue, provided France's ratings are also 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'.