OREANDA-NEWS. Fitch Ratings has affirmed Agence Francaise de Developpement's (AFD) Long-term Issuer Default Rating (IDR) at 'AA' with a Stable Outlook, and its Short-term IDR at 'F1+'. A full list of rating actions is available below.

The affirmation reflects the unchanged links between AFD and the French state over the last 12 months, including a strong probability of support from the state given AFD' status as public agency and its strategic role as the main supplier of French development aid. This status reflects the ultimate responsibility of the French state for AFD's solvency and liquidity, together with strong monitoring and control.

On 25 August, the French President announced that AFD will be backed by the Caisse des Depots et Consignations (AA/Stable/F1+). Although details are not yet available we believe that this would not have a significant impact on the link between the French state and AFD.

KEY RATING DRIVERS
Fitch classifies AFD as a dependent public sector entity (PSE) under its rating of public sector entities criteria, due to a statutory solvency guarantee, its legal status, strategic importance to, and, to a lesser extent, control by and integration with the state. As a result the ratings of AFD are equalised with France's ratings (AA/Stable).

AFD is the state's development bank. Its missions are defined by the government and monitored by sponsor ministries (foreign affairs, finance, interior and overseas). The policy framework for French development aid was last updated in June 2013 and confirmed AFD's role as a central operator. The state provides support to AFD through borrowing and loans guarantees as well as budgetary transfers. Fitch expects state funding to remain stable over the medium term as development aid is protected from the French government's spending cuts.

Due to it being an industrial and commercial public agency (EPIC), AFD cannot be liquidated or file for bankruptcy proceedings. It can only be dissolved by law, which would entail an automatic and unconditional transfer of all its assets and liabilities to the state, or to another public entity designated by the state. Furthermore, according to law 80-539 of 16 July 1980, the state is ultimately responsible for the financial commitments of its EPICs and is in charge of mobilising all necessary resources to enable an EPIC to repay its debt.

AFD's outstanding loans in 2014 were up by 17.7%, a pace similar to the 15.9% seen in 2013. This is in line with AFD's business plan, which could lead to the balance sheet doubling in size by 2020. Business growth in 2014 was almost entirely due to AFD's own-risk lending abroad. Of its outstanding loans at end-2014, 95% were contracted at AFD's own risk.

Earnings before taxes totalled EUR146m in 2014, against EUR184m in 2013, as conservative provisioning offset the benefits of cheap funding. Its cost/income ratio remains high, reflecting its narrow interest margin, the cost of its agencies' network, and the importance of high-cost advisory services to borrowers.

Strong lending growth has not been matched by capital issuance or retained earnings, resulting in a deterioration of capital ratios since 2007. Capitalisation remains sound, but the regulatory capital ratio fell slightly to 17.4% at end-2014, from 18.1% at end-2013. AFD's core Tier 1 ratio also decreased to 8.7% in 2014, from 10.9% in 2013. 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-2014, short-term funding relied on a EUR2bn certificate-of-deposit programme and on a EUR30bn EMTN programme.

RATING SENSITIVITIES
Any action on France's sovereign ratings would be reflected by AFD's ratings.

Although unlikely, an adverse change in AFD's legal framework could also trigger a downgrade.

The rating actions are as follows:

- Long-term IDR: affirmed at 'AA'; Outlook Stable
- Short-term IDR: affirmed at F1+
- EUR30bn EMTN programme: affirmed at 'AA'/'F1+'
- EUR2bn certificates of deposits programme: affirmed at 'F1+'
- Senior unsecured notes: affirmed at 'AA'
- Subordinated notes: affirmed at 'AA-'