Belgian Community of Flanders Affirmed At 'AA/A-1+' On Very Strong Management And Very Strong Economy; Outlook Stable

Research Update: Belgian Community of Flanders Affirmed At 'AA/A-1+' On Very Strong Management And Very Strong Economy; Outlook Stable Primary Credit Analyst: Mehdi Fadli, Paris (33) 1-4420-6706; mehdi.fadli@standardandpoors.com Secondary Contact: Jean-Baptiste Legrand, Paris (33) 1-4420-6764; jb.legrand@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Key Statistics Ratings Score Snapshot Key Sovereign Statistics Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 1

Research Update: Belgian Community of Flanders Affirmed At 'AA/A-1+' On Very Strong Management And Very Overview We cap our long-term rating on the Community of Flanders based on our 'AA' longterm rating on Belgium. We assess Flanders' stand-alone credit profile at 'aa+', reflecting our views of its very strong management, very strong budgetary performance, and very strong economy. We are affirming our 'AA/A-1+' ratings on Flanders. The stable outlook on Flanders mirrors that on Belgium. Rating Action On Oct. 16, 2015, Standard & Poor's Ratings Services affirmed its 'AA' long-term and 'A-1+' short-term issuer credit ratings on the Belgian Community of Flanders. The outlook remains stable. At the same time, we affirmed our 'AA' long-term issue rating on the community's 10 billion euro medium-term note (EMTN) program and our 'A-1+' short-term issue rating on its 1.5 billion Belgian commercial paper (CP) program. Rationale The ratings on Flanders primarily reflect our long-term sovereign credit rating on Belgium (unsolicited AA/Stable/A-1+). We cap the ratings on Flanders at the level of the long-term rating on Belgium because we don't think that current links between Belgium and its local and regional governments (LRGs) allow any of the Belgian LRGs to be rated above the sovereign (see "Methodology: Rating Non-U.S. Local And Regional Governments Higher Than The Sovereign," published Dec. 15, 2014, on RatingsDirect). In our opinion, Flanders' ability to mitigate negative intervention from the sovereign is limited mainly by its high dependence on combined and shared taxes collected by the state, as well as federal transfers. In accordance with our criteria, we assess Flanders' stand-alone credit profile (SACP) at 'aa+' (see "Methodology For Rating Non-U.S Local And Regional Governments" published June 30, 2014). The SACP is not a rating, but a measure which reflects Standard & Poor's opinion of an LRG's intrinsic creditworthiness, before taking into account the sovereign-related overriding factors, that is, the application of our ratings above the sovereign criteria and potential credit-specific extraordinary credit support from another government, when relevant. The SACP results from the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 2

combination of an LRG's individual credit profile and institutional framework assessment, adjusted, when appropriate, by one-notch of flexibility and creditspecific overriding factors. The 'aa+' SACP reflects our view of the very predictable and well-balanced institutional framework for Belgian communities and regions and Flanders' very strong financial management, economy, and budgetary performance, low debt burden, and strong liquidity versus exceptional previously. It also factors in our assessments of the community's average budgetary flexibility and moderate contingent liabilities. In our view, Flanders operates within Belgium's very predictable and well-balanced institutional framework for communities and regions, characterized by the maturity and stability of the system, and a generally good revenue and expenditure balance. In our opinion, Belgium's sixth state reform--which devolved new responsibilities to regions and communities and greater financial autonomy to regions--demonstrates the predictability of the system. Institutional discussions on the reform started in 2007, but the budgetary effects are felt only from 2015. We think that the reform also illustrates the ability of Belgian LRGs to influence federal government policy. The sixth state reform translates into a transfer of about 20 billion of new responsibilities from the federal state and social security to communities and regions, including about one-half for Flanders. This reform also incorporates amendments to the Special Financing Act, notably greater tax autonomy for regions. But it increases the LRGs' contributions to the consolidation of Belgium's public finances and pensions. We consider that Flanders will bear a high share of these consolidation efforts. We still estimate its contribution at approximately 840 million in 2015, 1.6 billion in 2016, and 1.7 billion in 2017. Nevertheless, in our base case, we anticipate that Flanders will be able to absorb these contributions while keeping a very strong budgetary performance, despite the negative impact on its budgetary balance from the implementation of the European system of national and regional accounts 2010 (ESA 2010), especially regarding the accounting treatment within the budget and not offbudget of some public-private partnerships (PPPs) and alternative funding. We think that the community will continue to structurally post an operating balance above 5% of operating revenues, except in 2016, when we anticipate higher operating expenditure than in our April 2015 base case. Moreover, mainly thanks to higher-than-expected capital revenues, 2014 actuals show a 0.5% surplus after capital accounts, compared with our previous base-case estimate of a deficit after capital accounts at 4.2% of total revenues. We consider that Flanders will post limited deficits after capital accounts in 2015 and 2016, at 1.1% of total revenues, before structurally returning to surpluses after capital accounts from 2017, because we expect the community will abide by its target of posting a balanced budget under ESA that year. In addition to its good operating balance, Flanders will likely strongly benefit from the acceleration of annual repayments of hybrids and the corresponding premium by KBC Bank N.V., which we assume at an average of 1 billion per year during 2015-2017. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 3

We project that these very sound budgetary results will be achievable because of the strength of Flanders' financial management and economy. We consider Flanders' financial management to be very strong, thanks to its very good political and managerial strength, good revenue and expenditure management, reliable budgeting, prudent and sophisticated debt management, and very efficient and optimized liquidity management. Therefore, we consider that Flanders has the means to maintain its tight rein over operating expenditures. Moreover, we believe Flanders' revenues will continue to benefit from its attractive and diversified economy, including promising high-value industries, and its very good socioeconomic indicators, including a low unemployment rate of 5% and GDP per capita that we estimate at 34,327 in 2014. We now anticipate only a slight decrease in tax-supported debt in 2017, to 47% of operating revenues compared with 50% at year-end 2014, versus our previous projection of 37% of operating revenues in 2017. This is mainly due to on-lending to social housing credit companies that Flanders has started implementing this year to improve funding costs because the community now consolidates these companies under ESA. Nevertheless, Flanders' debt burden remains low by international standards. It will be underpinned by Flanders' very strong budgetary performance, but also by automatic growth of the community's budget as a result of the sixth state reform, as new revenues compensate for new responsibilities. We consider that to maintain its very strong budgetary performance, Flanders could tap its average budgetary flexibility if needed. The community's modifiable tax revenues--the supplementary tax on personal income and regional taxes--will account for a moderate 34% of operating revenues from 2015 under our base-case scenario, and we expect capital expenditures will remain structurally close to 9% of total expenditures, which is not high by international standards. Still, we believe that Flanders would be less willing to tap its tax leeway, which we see as limited in practice, and more likely postpone capital expenditures because it already has excellent infrastructure in an international context. In addition to Flanders' budgetary flexibility, we consider that contingent liability risks are also moderate. Flanders' contingent liabilities mainly comprise its large spectrum of government-related entities and stakes in companies. These relate to the housing social credit companies Vlaamse Maatschappij voor Sociaal Wonen and Vlaams Woningfonds, but also to the community's PPPs in the construction phase, and its historical propensity to support the financial sector if needed. Under our downside scenario, Flanders' SACP could weaken to 'aa' if we observed a structural deterioration of its budgetary performance with increasing deficits after capital accounts, if Flanders was unable to contain growth in its expenses. Such deterioration might negatively affect our assessment of the community's financial management. We currently do not see any realistic upside scenario in which we could assess Flanders' SACP at 'aaa'. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 4

Liquidity We now view Flanders' liquidity as strong under our criteria, versus exceptional previously. We consider that the community has an adequate debt-coverage ratio, versus strong previously, and strong access to external liquidity. Since 2012, Flanders has had a multiyear 3 billion account facility that it will raise to 3.25 billion from February 2016. Despite this increase, we expect Flanders' debt service coverage ratio will decrease as it uses its liquidity line more extensively. We expect the amounts available on the account facility, and the community's cash holdings, will cover between 80% and 120% of the community's debt service in the next 12 months, including a long-term debt capital repayment peak of 1.25 billion in July 2016, the average outstanding amount of Belgian CP, and the capital part of the PPP cash outflows. We also think that Flanders has strong access to external funding via the financial markets, especially through its 10 billion EMTN program and its 1.5 billion Belgian CP program. In our opinion, at any time, the amount available under Flanders' account facility will cover 100% of its CP outstanding. Outlook The stable outlook on Flanders mirrors that on Belgium. All other things remaining equal, we would upgrade Flanders if we upgraded Belgium to 'AA+' and if the community continued to perform in line with our current base case. Given our stable outlook on Belgium, we currently see less than a one-in-three probability of an upgrade over our forecast horizon to year-end 2017. If we downgraded Belgium we would downgrade Flanders. Given Flanders' currently strong 'aa+' SACP, we do not see any realistic scenario that would lead us to downgrade Flanders to 'AA-' based on its stand-alone credit quality. Key Statistics Table 1 Community of Flanders Financial Statistics --Fiscal year ending Dec. 31-- (Mil. ) 2013a 2014a 2015bc* 2016bc* 2017bc* Operating revenues 26,598 27,151 37,033 37,684 38,961 Operating expenditures 24,370 25,021 35,175 36,507 36,643 Operating balance 2,228 2,130 1,858 1,178 2,317 Operating balance (% of operating revenues) 8.4 7.8 5.0 3.1 5.9 Capital revenues 2,280 1,339 1,087 1,925 1,534 Capital expenditures (capex) 2,589 3,341 3,382 3,540 3,640 Balance after capital accounts 1,919 128 (437) (437) 211 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 5

Table 1 Community of Flanders Financial Statistics (cont.) --Fiscal year ending Dec. 31-- (Mil. ) 2013a 2014a 2015bc* 2016bc* 2017bc* Balance after capital accounts (% of total revenues) 6.6 0.5 (1.1) (1.1) 0.5 Net onlending 0.0 0.0 (1,000) (1,400) (1,000) Debt repaid (long- and short-term) 2,312 1,637 434 1,354 154 Gross borrowings (long- and short-term) 0 1,472 1,756 2,700 1,000 Balance after borrowings (394) (37) (115) (491) 58 Direct debt (outstanding at year-end) 5,912 6,077 7,875 9,221 10,067 Direct debt (% of operating revenues) 22.2 22.4 21.3 24.5 25.8 Interest (% of operating revenues) 0.7 0.6 0.3 0.5 0.4 Tax-supported debt (% of consolidated operating revenues) 48.9 49.8 41.9 46.5 47.4 Capital expenditures (% of total expenditures) 9.6 11.8 8.8 8.8 9.0 The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. *From 2015, the significant budget increase follows the implementation of the sixth reform. a--actual. bc--base case reflects Standard & Poor's expectations of the most likely scenario. Table 2 Community of Flanders Economic Statistics --Fiscal year ending Dec. 31-- 2011 2012 2013 2014bc 2015bc 2016bc 2017bc Population ('000s as of Jan. 1) 6,307 6,351 6,382 6,411 6,438 6,464 6,489 Population growth (%) 0.90 0.7 0.5 0.5 0.4 0.4 0.4 Unemployment rate (%) 4.3 4.6 5.1 5.0 N.A. N.A. N.A. GDP (nominal) per capita ( ) 32,412 33,554 33,973 34,327 34,796 35,766 36,769 Real GDP growth (%) 2.0 0.1 0.3 1.2 1.3 1.6 1.7 The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources typically include national statistical offices, Eurostat, and Experian Limited. bc--base-case forecast; reflecting Standard & Poor's expectations of the most likely scenario. N.A. -- Not available. Ratings Score Snapshot WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 6

Table 3 Community of Flanders Ratings Score Snapshot Key rating factors Institutional framework Economy Financial management Budgetary flexibility Budgetary performance Liquidity Debt burden Contingent Llabilities Very predictable and well-balanced Very strong Very strong Average Very strong Strong Low Moderate *Standard & Poor's ratings on local and regional governments are based on eight main rating factors listed in the table above. Section A of Standard & Poor's "Methodology For Rating Non-U.S. Local And Regional Governments" summarizes how the eight factors are combined to derive the rating. Key Sovereign Statistics Sovereign Risk Indicators, October 12, 2015. An interactive version is also available at http://www.spratings.com/sri. Related Criteria And Research Related Criteria Criteria - Governments - International Public Finance: Methodology: Rating Non- U.S. Local And Regional Governments Higher Than The Sovereign - December 15, 2014 Criteria - Governments - International Public Finance: Methodology For Rating Non- U.S. Local And Regional Governments - June 30, 2014 General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions - November 19, 2013 Criteria - Governments - International Public Finance: Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs - October 15, 2009 Criteria - Governments - International Public Finance: Methodology And Assumptions: The Impact Of PPP Projects On International Local And Regional Governments: Refined Accounting Treatment - December 15, 2008 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 7

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria and Research'). Ratings List Ratings To From Flanders (Community of) Issuer credit rating Foreign and Local Currency AA/Stable/A-1+ AA/Stable/A-1+ Senior Unsecured Local Currency AA AA Commercial Paper Local Currency A-1+ A-1+ Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420- 6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. Additional Contact: International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 16, 2015 8

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