Fitch Affirms Agence Francaise de Developpement at 'AA'; Outlook Stable
Fitch has also affirmed AFD's EUR30bn EMTN programme at 'AA' and 'F1+' and EUR2bn certificates-of-deposit programme at 'F1+'. Senior unsecured notes have also been affirmed at 'AA'.
The affirmation reflects the unchanged links between AFD and the French state over the past 12 months, including our expectations of strong extraordinary support from the state. AFD is the French state's development agency. Its mission is to implement in foreign countries and in French overseas territories financial operations supporting economic and social development.
KEY RATING DRIVERS
Under its rating of public-sector entities criteria, Fitch classifies AFD as a credit-linked entity to the French state (AA/Stable/F1+), and equalises AFD's ratings with those of the sovereign. In Fitch's view, AFD would benefit from very strong state support in case of need, due to its Etablissement Public Industriel et Commercial (EPIC) status, its strategic role in governmental policies, and thorough oversight by the state.
The EPIC status reflects the ultimate responsibility of the French state for AFD's solvency and liquidity. As an EPIC, AFD cannot be liquidated or go bankrupt. It can only be dissolved by law, which would entail an automatic unconditional transfer of all its assets and liabilities to the state, or to another public entity designated by the state. It is also allowed to access state emergency financial support mechanisms such as emergency loans or the purchase of AFD's long-term bonds or short-term notes by the French treasury. Fitch assumes that these mechanisms would be activated in a timely manner in case of need.
AFD implements one of the state's core missions as it is the main operator of development aid policy, which is an important foreign policy instrument in France. It finances development projects in designated foreign countries, within the policy framework defined by the French government, and also funds development projects in French overseas territories.
The French government also relies on AFD to implement the sustainable development goals set within the 2030 Agenda of the United Nations for Sustainable Development. AFD has several subsidiaries, most importantly Proparco, a 63.9%-owned development finance institution dedicated to funding private investments abroad. AFD and its subsidiaries are consolidated in the AFD Group.
The French state exercises close oversight over AFD. This is ensured by significant representation of the state on AFD's Board of Directors and the nomination of the Chairman and Managing Director by state decree. Ongoing audits are carried out by the supervising ministries (economy, cooperation, overseas territories and immigration) and AFD is also subject to the ultimate control of the state's supervisory bodies (national audit court, state's general inspectors).
AFD Group's loans were up 11.9% in 2015, following an 18.1% increase in 2014. In line with the French state's commitment to develop AFD's activities, growth in loans should continue in the coming years. According to AFD's business plan, the group's annual commitments were EUR8.3bn in 2015 and should reach EUR12.5bn in 2020.
In 2015, AFD Group's profit before tax totalled EUR199m, up 36.5% from 2014. Net banking income increased 17% in 2015 to EUR594m, as interest revenue grew significantly faster than interest expenditure. The cost-income ratio remained high at 51.9% in 2015, reflecting the cost of the agency's network and the importance of high-cost advisory services to borrowers.
In 2015, AFD Group's capital adequacy ratio and Tier 1 ratio were 16.72% and 9.42%, respectively, above their respective minimum regulatory levels of 8% and 6%. The ratios have declined in recent years as strong lending growth has not been fully matched by capital issuance or retained earnings. Nonetheless, we believe the state will ensure that AFD has the means to implement its business plan while maintaining sound capital ratios.
AFD faces low refinancing risk due to its fairly large capital base, its long-funding structure, and the predictability of its loan disbursement schedule. At end-2015, short-term funding relied on a EUR2bn certificate-of-deposit programme and on a EUR30bn EMTN programme.
Changes to France's sovereign rating would be mirrored in AFD's ratings. An adverse change to AFD's legal status, with weaker state support, could also lead to negative rating action.