OREANDA-NEWS. Fitch Ratings has affirmed France-based Unedic's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'AA' with Stable Outlooks and Short-term foreign currency IDR at 'F1+'.

Unedic's EUR31bn euro medium-term note (EMTN) programme has also been affirmed at 'AA' and 'F1+', and the senior unsecured notes at 'AA'. Its EUR10bn billets de tresorerie (BT) programme has been affirmed at 'F1+' and EUR6bn medium term notes (BMTN) at 'AA'.

The affirmation reflects the unchanged link between Unedic and the French state (AA/Stable) since our last review. The affirmation reflects our view of a strong probability of extraordinary support from the state given Unedic's strong strategic importance for, and integration with the French state, notably through the explicit state guarantee of Unedic's long-term bond issues. To a lesser extent, the ratings also factor in Unedic's moderately supportive legal status of a private association and the control from the sponsor.

KEY RATING DRIVERS

Fitch classifies Unedic as credit-linked to France under its 'Rating of Public Sector Entities - Outside the United States' criteria top down-approach, in light of the very strong expected extraordinary support from the state. The ratings reflect Unedic's mission as the sole manager of the French unemployment insurance system (UIS) under state delegation. They are underpinned by the French Labour Code regulating its financial stability, and by support from the government through its approval of the unemployment insurance agreement.

The UIS, the agreements signed between the social partners and the approval by the state are mandatory under the French Labour Code. This agreement sets the contribution rates of employers and employees affiliated to Unedic. The agreement covering 2014-2016 has been renewed (except for provisions dedicated to entertainment workers, for which an agreement was found) for an indefinite period from 1 July 2016 by state decree (29/06/16), after the negotiations between employees' and employers' representatives failed to agree on a new convention.

Although the state does not exercise formal control, it supervises Unedic's management through the presence of a state comptroller in Unedic's governance institutions and through its approval of the unemployment insurance agreement. In the absence of approval of the insurance agreement, the state is responsible for Unedic's debt repayment.

Since 2011, Unedic has benefited from an explicit state guarantee of its long-term bond issues, under its EUR31bn EMTN programme. EUR25.3bn as of end-May 2016, or 81% of total gross debt benefited from the explicit state guarantee. The 2016 guarantee is on an overall issued amount of EUR5bn (2015: EUR6bn). This covers the repayment of principal, interest and fees. This guarantee exempts Unedic from the application of the article L.213-15 of the monetary code, which obliges the associations facing declining equity to restore it unless they lose the ability to raise bonds. As a marketable debt instruments, issues from the BMTN and BT programmes do not fall under the scope of this legal provision, therefore the state guarantee is not required.

Unedic's performance is sensitive to the economic cycle and has to be viewed in light of its not-for-profit mission and counter-cyclical role as an economic and social buffer. In 2015, the sluggish economy led to moderate growth of the French private sector payroll, which is the basis of unemployment contributions (+1.5%). Amid still growing unemployment and under the full year effect of the 2014-2016 convention provisions (with an automatic expansion of UIB beneficiaries), insurance allocations rose by 2.8%, with 2.7 million people on unemployment benefits. The deficit in the UIS increased to EUR4.2bn (2014: EUR3.7bn). Over the medium term, Unedic projects a progressive recovery (GDP to grow 1.4% in 2016, 1.5% in 2017). Unedic's annual deficit is expected to reach around EUR4.1bn each year in 2016 and 2017.

Since 2009, the insufficient coverage of unemployment benefits by contributions paid by private sector employers and employees has caused Unedic's net financial debt to rise significantly, to EUR25.9bn from EUR4.9bn in 2008. It is likely to reach EUR34bn in 2017 according to the latest projections from Unedic. At May 2016, 81% of the debt was long-term bonds, 10% BMTN and 9% BT. As of July 2016, Unedic had issued 100% of its EUR5bn targeted long-term funding for the current year; and planned to tap its BMTN programme to cover its funding needs until the end of the year (around EUR2.2bn).

The EUR10bn CP programme is secured by back-up lines corresponding to 15 days of either total expenditure or CP repayments with a sufficient liquidity buffer of a minimum of EUR2bn. In case of adverse market conditions, Fitch believes that this buffer would be sufficient to meet immediate liquidity demands before the state steps in to provide financial support to Unedic. Fitch believes that support would be forthcoming in view of Unedic's strategic importance.

RATING SENSITIVITIES

Any rating action on the sovereign would be reflected by Unedic's ratings. A significant unfavourable change to UIS's characteristics would also prompt a downgrade. A downgrade could also result from a weaker liquidity back-up package.