OREANDA-NEWS. April 14, 2016. Fitch Ratings has affirmed Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V.'s (FMO) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA' with a Stable Outlook, and its Short-term foreign currency IDR at 'F1+'.

Fitch has also affirmed FMO's EUR6bn debt issuance programme (DIP) at Long-term foreign and local currency 'AAA' ratings and Short-term foreign and local currency 'F1+' respectively and senior unsecured bonds at Long-term foreign and local currency 'AAA'. FMO's EUR175m subordinated (Tier 2) notes maturing in December 2025 have also been affirmed at 'AA+'.

[The affirmation reflects the unchanged links between FMO and the Dutch government since our last rating action in April 2015, including our expectations of strong extraordinary support from the state, the state control on FMO and the strategic importance FMO has for the Netherlands].

KEY RATING DRIVERS
FMO's ratings are aligned with those of the Netherlands (AAA/Stable/F1+) due to Fitch's expectations of strong extraordinary support from the state. This was formalised in a 1998 agreement between FMO and the government. The ratings also reflect state control and oversight as well as FMO's strategic importance for Dutch development aid policy. FMO obtained a full banking license in 2014 and is regulated as a bank. However, Fitch considers FMO is a credit-linked entity and uses a top-down approach under its non-US public sector entities criteria to rate it.

As a development finance institution, FMO's main goal is to support sustainable private initiatives in emerging markets, in accordance with Dutch development aid policy. Its core business is to provide long-term financing (outstanding EUR4.25bn net loans at end 2015; equity investments EUR1.47bn) to private companies and financial institutions. In addition, FMO manages several strategic development funds on behalf of the Dutch government. These off-balance-sheet funds totalled EUR1.19bn at end-2015.

Under Article 8 of the sovereign support agreement, the state is legally bound to enable FMO to meet its financial obligations on time, notably by providing liquidity. Article 7 of the agreement provides for the state's maintenance obligation in most circumstances to safeguard FMO's solvency. The state's obligation is to FMO, not to third parties. The tenor of the agreement is indefinite and its termination requires 12 years' notice.

The Dutch state owns 51% of FMO's shares, through the Ministry of Finance. The remaining 49% is owned by large Dutch banks, Dutch institutions and private individuals. Fitch considers it highly unlikely that the state would give up its majority stake, as the state guarantee can only be revoked with 12 years' notice.

The Ministry of Finance and Ministry of Foreign Affairs oversee FMO's activity and accounts. The Ministry of Finance focuses on FMO's risk policy and financial results while the Ministry of Foreign Affairs assesses FMO's policy development.

Over recent years, FMO's profitability has been solid and resilient. It benefits from a healthy net interest margin owing to its low funding cost and the typically high yield generated by businesses conducted in emerging countries. In 2015, despite a challenging market environment, FMO's profitability increased, partly due to the appreciation of USD, with a record net profit of EUR174m, up from EUR124m in 2014.

Although FMO's total committed investment portfolio increased to EUR9.2bn in 2015 from EUR8bn in 2014, the quality of FMO's loans and investments portfolios remained fairly stable. Profitability remained high with the return on shareholders' equity at 7% in 2015, notably in light of FMO's strong interest margin. Fitch expects the return on equity will remain stable in the medium term, despite the volatility of the markets in which FMO operates.

FMO's regulatory solvency is strong (core Tier 1 capital ratio of 22.9.% at end-2015) and its leverage is particularly low (equity/assets of 29.8% at the same date). FMO's capital ratios were strengthened in 2015 by the issuance of EUR175m Tier 2 notes callable in December 2020 and maturing in December 2025.

FMO's Tier 2 notes are rated one notch below the institution's IDR, reflecting the risk of repayment subordination to senior unsecured debt-holders in case of liquidation, bankruptcy or emergency regulation being declared applicable to FMO by the supervisory authority as per provisions of the bond memorandum (or other deliberations), despite the state support extended to all FMOs' debt liabilities.

RATING SENSITIVITIES
Negative rating action could result from a downgrade of the Netherlands' sovereign rating or adverse changes to the state's oversight and support of FMO -notably the weakening of the agreement between the state and FMO, associated with a reduction in FMO's state ownership