With France's political drama over, bankers' attention turns to how the newly elected administration will manage its state owned companies. Privatisation is the watchword, and, wary of ratings agency action, some of France's top names are already marketing themselves with savoir faire. Neil Day asks if these revered and tightly priced entities can find support from international investors when their capital is freed.
The success of the centre-right coalition in winning an absolute parliamentary majority in the second round of elections on June 16 will have profound implications for French society, especially after five years of cohabitation and more recently the trauma of Jean-Marie Le Pen's gains in the presidential elections. So if the decision by Moody's to change the outlook of Gaz de France's (GdF) Aa1 rating from stable to negative three days later failed to keep Jacques Chirac off the front pages of Le Figaro or Libération, it will come as no surprise.
Nevertheless, those involved at the high end of the French credit spectrum will be watching Chirac and his government closely over the coming year for clues as to how quickly the new regime will privatise certain state owned companies and, more importantly, how strongly it resists pressure from the European Commission and France's EU partners to liberalise the economy.
Although Chirac and his partner/adversary Lionel Jospin won concessions on this front at the European summit held in Barcelona in March, GdF and Electricité de France (EdF) in particular are seen as likely candidates for partial privatisation, as the rapid move by Moody's shows. But even before Chirac won his outright majority, analysts were already factoring in a lower degree of state support for the two entities; GdF was cut from Aaa to Aa1 by Moody's in June 2000 as the Jospin's government discussed the possibility of a partial privatisation of the utility.
Just how long it will be before there are further declines in credit quality is hard to forecast. "There is pressure from Brussels on the government, and GdF and EdF are obvious targets," says Denis Prouteau, who is responsible for sovereign, supranational, agency and local authority origination at CDC IXIS in Paris. "However, it is a sensitive issue here in France and it is too early to say just how long it will be until any partial privatisation takes place."
Fortunately for bondholders, the issuers at the top of the list of likely privatisation candidates are taking a proactive approach to the subject in their financing. When Aaa/AA EdF, for example, approached the markets in October 2001 for Eu800m of 15 year funding via Crédit Agricole Indosuez (CAI), Merrill Lynch and UBS Warburg, it not only marketed its status as an EPIC (établissement public à caractère industriel et commercial) - with the government protection that proffers upon any borrower - but highlighted its strengths as a standalone business. In this, it was backed up by support from the rating agencies, Moody's, for example, stating: "Even without the EPIC status or as a partially privatised company, EdF remains a cash-generative company and a downgrade of one, or at most two, notches is expected."
"EdF was smart to market itself on the basis of its fundamentals," says Prouteau at CDC IXIS, "whether or not it is 100% owned by the state. It came at 25bp over swaps and is trading at 27bp-28bp over - not far from what is usual for a borrower of its quality and rating. And if the company is partially privatised at some point, you won't see the spread widen much further: the state is likely to retain a large holding in EdF and the company will remain a strong utility. Overall, the borrower was very fair to bondholders."
That the market is already pricing in a high probability of the government opening EdF's capital to the public is clear from the level its paper trades at. Compare the 27bp-28bp spread to the 4bp over mid-swaps re-offer level achieved by triple-A rated La Poste with its Eu440m 15 year issue via BNP Paribas and HSBC in mid-June.
The French postal service is one of a select group of borrowers that can still achieve levels that never fail to surprise. Despite all the change that the euro has inspired, the French agency market appears to be one of the few niches of the pre-single currency European bond markets to have survived almost untouched.
"There is still a specific, old-style French agency market, where borrowers such as RATP, La Poste and CNA still trade at the same very tight levels they did when the euro was introduced," says Jean-Luc Lamarque, head of syndicate at CAI. "This is very different to what we have seen happen to other triple-A sectors, particularly in the covered bond market.
"If, for example, you look at DePfa, which is one of the premier names in the covered bond market, a couple of years ago it was trading 5bp or more through swaps in the 10 year segment, and now it is trading close to 10bp over. RATP traded at around Libor flat two years ago, and is now barely wider, at about 2bp over. So while DePfa has widened be over 10bp, French agencies have widened 2bp-3bp, or 5bp at most."
The ability of French agencies to achieve such competitive funding is largely due to the strong domestic bid that remains for the names. Nevertheless, one DCM official in Paris believes that the agencies are winning new fans because despite the small size of their issues, it is not too difficult to find a bid for paper, and at the same time their supply is limited. "French agencies are viewed as a good balance between relative liquidity and quality," says the banker. "You can see from the performance of borrowers such as the European Investment Bank, Freddie Mac and Kreditanstalt für Wiederaufbau that those who come to the market in big size appear to be suffering right now from a structural supply overflow. You can see that from the way that their spreads keep widening, with every new issue coming wider than the last. That's something that the French agencies definitely don't suffer from."
While this may be true, as long as the majority of French agencies - with the help of their domestic fans and banks competing zealously for their mandates - are able to tap the market at such tight levels, the are unlikely to win over many international investors. But one French agency has shown that a more outward looking strategy can be rewarding.
Réseau Ferré de France, which owns and manages the French railway infrastructure, has been a regular but not profligate borrower on the more international side of the euro market since its inception, and has made several forays into other currencies, notably sterling. For its balanced approach to the market, the agency has been rewarded with what it needs most: long dated funding.
"Because of the nature of RFF's business, we have to raise funds in very long maturities," says Pierre Fourrier, head of the agency's finance department. "The average life of RFF's assets is very long and we need to match our liabilities with these as far is possible. The euro market is not very mature at the very long end so we need to cope with the situation by tapping different currencies where longer maturities are possible."
So while RFF is examining potential projects for the present - such as an inflation linked transaction, because part of its balance sheet is linked to inflation - it is looking forward to the possibilities the future may bring. "We can see the market changing, particularly for triple-A public bodies like ourselves," says Fourrier. "We definitely think that the euro market is more mature than it used to be and we are waiting for a market that could absorb 30 to 50 year bonds like the sterling market. Sooner or later it will happen." *