July 16, 2012 / 9:53 AM / 5 years ago

TEXT-Fitch affirms CADES at 'AAA'; outlook negative

(The following statement was released by the rating agency)

July 16 - Fitch Ratings has affirmed Caisse d'Amortissement de la Dette Sociale's (CADES) Long-term foreign and local currency ratings at 'AAA', and Short-term rating at 'F1+'. The Rating Outlook for the Long-term ratings is Negative.

The ratings of CADES primarily reflect its public agency status ("etablissement public national a caractere administratif"; EPA). In Fitch's view, this status provides an ultimate guarantee from the French State ('AAA'/Negative/'F1+') on CADES' solvency and liquidity, together with strong monitoring and control by the State. The ratings also take into account CADES' strategic importance to the French social security system, its secure revenue sources and its sound debt and liquidity management. The Outlook mirrors that on the Republic of France's Issuer Default Rating.

Any negative action on France's ratings would be reflected in CADES' ratings. Although unlikely, an adverse change in CADES's legal framework could also trigger a downgrade.

CADES faces potential liquidity risk due to the nature of its activities (refinancing and amortising social security debt). However, this is mitigated by the diversity and the quality of its short-term funding programmes as well as by sufficient back up lines and liquidity facilities. In addition, in the event of an acute/extreme liquidity shortfall CADES would have immediate access to State liquidity support mechanisms.

CADES' debt stock is consolidated in France's general government debt; it amounted to EUR143.1bn at end 2011, or 8.4% of the latter. At year-end 2011, CADES had amortized EUR59.6bn of debt, out of total cumulated debt transfers of EUR202.4bn, since its creation in 1996.

The 2011 Social Security Funding Bill (SSFB) enacted that additional debt transfers from social security will be made gradually from 2012 to 2018 for a total EUR62bn; the 2012 SSFB further enacted EUR2.5bn of additional debt.

CADES's solvency is strongly underpinned by its revenue structure, whereby a recurrent tax, the "contribution au remboursement de la dette sociale" (CRDS), at a flat rate (0.5%) paid on almost all types of revenue is specifically dedicated to CADES's debt amortization. Since 2009, CADES has received also a share of the "contribution sociale generalisee" (CSG), another activity related tax. As for CRDS, CSG's base has been increased to 98.25% of all activity-related revenue in 2012, from 97% in 2011.

Fitch considers that the organic principle according to which transfers of any new debt to CADES have to be offset by corresponding new resources, recently reinforced by a constitutional court decision, strongly backs its operating revenue streams and hence, debt affordability. Considering that enhanced financing sources were granted to CADES in 2011 - an increase to 0.48% (from 0.2%) of the CSG rate, an annual transfer from the French Pension Fund (EUR2.1bn per year), and an allocation of part of the social charges on capital and investment- and that CADES posted a current balance of EUR11.7bn in 2011, Fitch projects that CADES will have fully repaid its debt by 2025.

CADES's liquidity, counterparty, debt risk management processes and contingency policies show a high level of security, and CADES is able to tightly monitor its medium and long term debt repayment targets through a varied set of interest, inflation and revenue growth scenarios.

A full rating report on CADES will shortly be available on www.fitchratings.com.

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