Fitch Ratings has assigned Societe de Financement Local (SFIL) Long-term local and foreign currency ratings of ‘AA+’ and a Short-term foreign currency rating of ‘F1+’. The Negative Outlook mirrors that on France’s ratings (‘AAA’/Negative/’F1+’).
RATING RATIONALE The ratings reflect the strong commitment of support from the French state to SFIL as its majority and reference shareholder (75% of capital), and due to SFIL’s high strategic interest as an essential funding source for the French public sector.
SFIL, which was fully created on 31st January 2013, is considered a “development bank” by the European Commission (EC) as it aims to address a structural market deficiency regarding the funding of the French local public sector. Considering the political and economic importance of the French local authorities, Fitch believes SFIL will remain a highly strategic asset for the state.
The state does not guarantee SFIL but has explicitly pledged its full support to SFIL or its subsidiary Caisse Francaise de Financement Local, a covered bond issuer formerly known as Dexia Municipal Agency. The state’s ability to bring support is underpinned by SFIL’s status as a “development bank”, which allows direct state capital intervention under European state aid regulations.
Fitch considers that the state is the only entity able and willing to ensure the long-term viability of SFIL’s business model and its potential capital needs, notably with regards to potential losses stemming from existing loans portfolio. Therefore we consider SFIL a state-dependent entity and notch down its ratings from those of France.
The state will tightly control SFIL’s administrative board, as all important decisions will require its approval as majority shareholder. The possible gradual sale of state shares to La Banque Postale (LBP, ‘AA-‘/Negative/’F1+’) in the medium term could slightly dilute the state’s control of the board’s decisions.
Long-term compliance with the business model approved by the EC conditions the applicability of the “development bank” status and the state’s leeway in terms of support.
SFIL is not expected to originate loans, but will provide middle and back-office services for loans originated by a joint venture (JV) between Caisse des depots et consignations (CDC, ‘AAA’/Negative/’F1+’) and LBP. Caisse Francaise de Financement Local will refinance loans originated by the JV if the loans comply with SFIL’s lending policy and asset liability management. Loans extended by SFIL will be limited to plain vanilla long term loans to local authorities and public hospitals.
SFIL expects its regulatory Tier 1 ratio, consolidated with Caisse Francaise de Financement Local, to reach a high 23%, which would increase to 26% in the medium term.
With 20% and 5% of SFIL’s capital, respectively, CDC and LBP are committed to providing long- and short-term funding at market rates. Cumulated funding from CDC is capped at EUR12.5bn, while LBP will provide liquidity support in proportion with its share of newly-originated loans.
RATING SENSITIVITIES The ratings could be downgraded if we perceived a weakening of potential support from the state. A downgrade of France would also be reflected in SFIL’s ratings.
KEY ASSUMPTIONS SFIL’s ratings depend on those of France, which are based on some key assumptions regarding macroeconomic and budgetary performance, notably Fitch forecast of 0.3% GDP growth in 2013, 1.1% in 2014 and 1.6% until 2016.
The rating is potentially sensitive to policy actions that would materially increase public debt and/or contingent liabilities as a result of state intervention in the domestic economy and industry.
The difference with the government’s forecast of 0.8% growth in 2013 rising to 2% in 2014 largely accounts for the higher general government gross debt (GGGD) to GDP ratio projected by Fitch compared to official projections. Fitch expects GGGD to GDP to peak at 94% in 2014 and gradually decline thereafter to 89% by 2017 while the government projects a peak of 91.3% in 2013 declining to 82.9% by 2017.
Fitch assumes that commitments made by eurozone policymakers at recent summits, including the creation of a single supervisory mechanism for European banks will be implemented. The agency also assumes that the risk of fragmentation of the eurozone remains low and is not incorporated into Fitch’s current rating of France, although Fitch’s ‘CCC’ rating of Greece does reflect a material risk of Greek exit from EMU over the new few years.
France’s ratings also incorporate Fitch’s assumption that the government will adhere to its commitments under the Stability and Growth Pact, Fiscal Compact and as set out in its Multiyear Public Financing Plan.
A significant weakening of France’s financial profile would likely undermine its ability to provide support to its dependent entities. Therefore, under Fitch’s rating criteria on public sector entities outside the US, this could potentially justify a further notching down of SFIL’s ratings from those of France, up to a total of three notches.
The ratings also factor in the possible gradual sale of state-owned shares to LBP, which would ultimately bring the state’s shareholding to 47%, and would not affect the likelihood of state support in Fitch’s view.