TEXT-Fitch affirms European Financial Stability Facility debt at 'AAA'

Wed Dec 5, 2012 10:29am EST

Dec 5 - Fitch Ratings has affirmed the Long-Term rating of guaranteed medium
and long-term debt issued by the European Financial Stability Facility (EFSF) at
'AAA', and the Short-Term rating of the short-term (less than 12 months
contractual maturity) guaranteed debt instruments issued by the EFSF at 'F1+'.

The rating assigned to the EFSF's debt issues rely on the irrevocable and
unconditional guarantees and over-guarantees provided by 'AAA' and 'F1+'-rated
euro area member states (EAMS). These commitments are governed by an
international treaty signed in June 2010 by the 17 EAMS - the Framework
Agreement - and by a Deed of Guarantee.

The original Framework Agreement and Deed of Guarantee ensured that all payments
due on EFSF debt issues were covered by guarantees from EAMS pro-rata their
share (contribution key) in European Central Bank (ECB) capital, adjusted for
stepped-out guarantors, and over-guarantees (i.e. guarantees that could be
extended up to 120% of their initial amount in the event of one or more
guarantors stepping out of the pool of guarantors) rated 'AAA' or 'F1+', and by
a cash reserve ensuring sufficient liquidity.

The amendment to the Framework Agreement and Deed of Guarantee made in June
2011, applicable to all debt issued since October 2011, reduced the cash reserve
requirement for EFSF and extended the amount of over-guarantees by EAMS from
120% to a maximum of 165% of the initial guaranteed amount. This increased the
aggregate amount of guarantees and over-guarantee to EUR726bn, and the maximum
amount that EFSF can lend to EUR440bn (EUR726bn/1.65). As of end-November 2012,
EFSF's lending commitment stood at EUR188.3bn; this included loans and
commitments to Greece ('CCC'), Ireland ('BBB+'; Stable) and Portugal ('BB+';
Negative).

In addition to loans to EAMS under EU-IMF programmes, the June 2011 amended
Framework Agreement has authorised the EFSF to conduct a wider range of
financial assistance operations for EAMS including, loans to governments to fund
recapitalisation of financial institutions outside macroeconomic adjustments
programmes; purchases of sovereign bonds; and precautionary credit facilities.
In contrast to EAMS receiving EFSF loans under an EU-IMF programme, EAMS are not
expected to 'step-out' as guarantors in the event that they benefit from such
financial assistance operations, though such support is subject to some policy
conditionality as agreed under a memoranda of understanding.

While under the original framework agreement all loans had to be funded by debt
of the same maturity, the June 2011 amendment has also allowed EFSF to issue
short-term securities, implying a greater mismatch between the debt issued by
the EFSF and the loans that it extends. Another amendment to the Deed of
Guarantee has required EFSF's short-term debt issuance to be covered by
guarantees and over-guarantees from EAMS rated 'F1+', including guarantees from
EAMS with a Long-Term rating below 'AAA', such as Belgium ('AA'; Negative). This
amendment allowed the reduction of the amount of the over-guarantee ratio to
151.7% for short-term debt issued by EFSF, versus 160.8% for long-term debt.
Further flexibility was introduced by the February 2012 amendment to the Deed of
Guarantee, which requires new debt issues to be covered by guarantees from EAMS
having a rating equal or higher than that of EFSF, and not necessarily by EAMS
rated 'AAA' or 'F1+'.

The increase in the over-guarantee mechanism from 120% to up to 165%, in October
2011, has greatly reduced the cash reserves that the EFSF is required to hold in
order to ensure that principal and interest on its debt was fully covered by
'AAA' guarantors and cash. The current requirement is for the cash reserve to be
sufficient to service any debt payment at least three days prior to the payment
date; in addition, 10 days prior to the servicing of debt, the cash reserve has
to be at least equal to the share of the debt service payment not covered by
'AAA'/'F1+' rated guarantors or by EAMS having a rating equal or higher than
that of EFSF. The cash reserve has to be conservatively managed, and has to be
invested in high quality assets.

All EFSF debt issues are managed on its behalf by the German sovereign debt
agency Finanzagentur ('AAA'/Stable). Finanzagentur also undertakes treasury and
risk management for the EFSF, while the European Investment Bank ('AAA'/Stable)
provides administrative and legal support. The high credit quality of these
institutions considerably reduces operational risk associated with asset and
liabilities management and treasury management.

The main source of credit risk on EFSF debt lies in the possibility that one or
more of the largest 'AAA' guarantors fails to honour its guarantee commitment or
is downgraded. In the event of a downgrade of Fitch's rating of France (which
represents 21.8% of guarantees), the Outlook on which was revised to Negative in
December 2011, the 'AAA' guarantees and over-guarantees on outstanding EFSF debt
would drop below the level consistent with the 'AAA' rating at the current
lending capacity. Unless additional credit enhancement mechanisms are
introduced, the 'AAA' rating of outstanding medium and long-term debt issued by
the EFSF would thus be downgraded. The borrowing capacity of the EFSF would
remain unaffected, but the 'AAA' Long-Term rating would only apply to medium and
long term debt issues which are fully guaranteed by 'AAA' guarantees and
over-guarantees, (and also by the cash reserve for debt issued before
end-October 2011). Incorporated as a "Societe Anonyme' in Luxembourg, the EFSF
is a supranational financing vehicle created in 2010 to make loans to EAMS
facing financing difficulties. It is part of a wider European and international
initiative to support the eurozone, and benefits from broad political support.

Additional information is available at www.fitchratings.com.

The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Rating Multilateral Development Banks', dated 23 May 2012,
are available at www.fitchratings.com.

Applicable Criteria and Related Research:
Rating Multilateral Development Banks
European Stability Mechanism
European Financial Stability Facility (EFSF)
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