Action follows sovereign downgrade
Milan, November 20, 2012 -- Moody's Investors Service has today downgraded the ratings of two French government-related issuers (GRIs): Société Nationale des Chemins de Fer Français (SNCF) and Réseau Ferré de France (RFF). The outlook on both companies' long-term ratings remains negative.
Today's actions were prompted by the weakening of the French government's credit profile, as captured by Moody's recent downgrade of France's government bond rating to Aa1 from Aaa, with a continued negative outlook. For more details, please refer to Moody's PR (http://www.moodys.com/research/Moodys-downgrades-Frances-government-bond-rating-to-Aa1-from-Aaa--PR_260071)
The rating downgrades are as follows:
- SNCF: Long-term issuer rating downgraded by one notch to Aa2 from Aa1, while the short-term rating is unchanged at (P)Prime-1.
- RFF: Long-term senior unsecured ratings downgraded by one notch to Aa1 from Aaa, while the short-term and commercial paper (CP) ratings are unchanged at Prime-1.
Moody's has also lowered the Baseline Credit Assessment (BCA) of RFF to ba1 from baa3, while SNCF's baa1 BCA is unchanged. The BCA is a measure of a company's standalone financial strength without the assumed benefit of government support.
As SNCF and RFF are 100% state-owned, their ratings incorporate a very strong element of government support in accordance with Moody's rating methodology for such entities.
For additional information on Sovereign ratings, please refer to the webpage containing Moody's related announcements http://www.moodys.com/eusovereign
RATIONALE FOR DOWNGRADE AND NEGATIVE OUTLOOK
The main driver of the downgrade of SNCF's long-term ratings is the weakening of the French government's credit profile, as captured by Moody's recent downgrade of France's government bond rating, given the strong government support that is incorporated into SNCF's ratings. As a GRI, SNCF's ratings and outlook are closely aligned with those of the government of France. This reflects the very high level of dependence and support that SNCF benefits from owing to its special legal status as an EPIC (Etablissement Public à Caractère Industriel et Commercial) and the group's importance as an instrument of France's public policy.
In accordance with Moody's GRI rating methodology, SNCF's Aa2 issuer rating reflects the combination of the following inputs: (1) an unchanged baa1 baseline credit assessment (BCA), which measures the group's standalone financial strength without the assumed benefit of government support; (2) the Aa1 local-currency rating of the French government; (3) and the "very high" support and "very high" dependence the group benefits from as an EPIC.
Despite the "very high" support that is incorporated in SNCF's issuer rating, Moody's had introduced a one-notch differentiation between SNCF's rating and that of the sovereign rating in July 2011. This reflected the rating agency's expectation that the very close link between SNCF and the French government will gradually loosen as the French railway market very slowly opens up to more competition, in line with EU initiatives, and as the EU competitive authorities focus ever more closely on ensuring a level playing field.
SNCF's BCA of baa1 is mainly supported by its low business risk, which is due to (1) the group's role as the monopoly provider of domestic transportation in France; (2) the stability of SNCF's revenues, driven by long-term contracts with regional French authorities related to regional transportation; and (3) a predictable operating environment. However, SNCF's BCA is also constrained by the group's credit metrics, which are affected mainly by four structural factors: (1) the poor performance of its freight activities; (2) the very high level of network access fees that it has to pay, which continues to affect the performance of SNCF Voyages, its high-speed division; (3) the low return from the activities of the Infra division; and (4) SNCF's high level of capital expenditure (capex).
The outlook on SNCF's ratings remains negative, reflecting the negative outlook on the sovereign rating.
The main driver of the downgrade of RFF's long-term ratings to Aa1 from Aaa is the weakening of the French government's credit profile, as captured by Moody's recent downgrade of France's government bond rating. The rating and outlook of RFF are currently aligned with those of the government of France due to the very high level of dependence and support RFF benefits from, owing to its special legal status as an EPIC (Etablissement Public à Caractère Industriel et Commercial), and the group's importance as an instrument of France's public policy.
In conjunction with downgrading the long-term senior unsecured ratings of RFF to Aa1, Moody's has reflected the group's weakly positioned status within this rating category by lowering the group's BCA to ba1 from baa3.
In accordance with Moody's GRI rating methodology, RFF's Aa1 long-term senior unsecured rating currently reflects the combination of the following inputs: (1) the adjusted ba1 BCA, which measures the group's standalone financial strength without the assumed benefit of government support; (2) the Aa1 local-currency rating of the French government; (3) and the "very high" support and "very high" dependence it benefits from as an EPIC.
RFF's lower BCA reflects the progressive increase in its net debt over recent years to EUR32 billion at year-end 2011 from EUR 28 billion at year-end 2008, and Moody's expectation that this will continue over the next two years. The increase in net debt is mainly due to the greater amount of investments that RFF will have to make in order to finance large projects (e.g., LGV Est, Tours-Bordeaux line). These investments will not be offset by a similar increase in the amount of grants received, and will consequently lead to a larger funding gap, which RFF will have to cover with debt issuances or available cash. During 2012, RFF is likely to undertake capex of around EUR5 billion, of which Moody's expects the group to receive only around EUR2.5 billion in the form of grants. Although Moody's believes that RFF's liquidity profile is still satisfactory -- with cash on balance sheet (EUR3.3 billion as at 30 June 2012) and access to a EUR1.25 billion fully undrawn credit facility likely to cover the gap between investments expensed and grants received as well as scheduled debt repayments over the next 12 months -- the rating agency nevertheless notes that the increased gap between investments and grants reduces the group's liquidity headroom and makes it more dependent on government support.
In accordance with Moody's GRI methodology, the change in the BCA to ba1 from baa3 does not trigger a downgrade of RFF's rating. The downgrade of RFF is only related to the weakening of the French government's credit profile, as captured by Moody's recent downgrade of France's government bond rating.
The outlook on RFF's ratings is negative, reflecting the negative outlook on the sovereign rating.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's would consider upgrading SNCF's rating only in the event of an increase in the level of state support that is available to the group, although the rating agency does not currently expect this to occur. Moody's would raise SNCF's BCA if (1) the group's EBITA margin were to increase to above 5%; (2) its debt/EBITDA ratio were to decrease to comfortably below 6.0x; and (3) its retained cash flow (RCF)/net debt ratio were to approach the mid-teens in percentage terms.
Moody's notes that government support for SNCF is currently at a very high level, and expects this to continue as long as the group's current ownership and legal structure remain unchanged. However, any reduction in the expected level of available support would most likely have a negative impact on the rating. While the rating will not necessarily change if there is a change in the level of dependence, the BCA could come under pressure if, inter alia, (1) SNCF's EBITA margin were to fall below 2.5%; (2) its debt/EBITDA ratio were to rise above 7.0x; and (3) its RCF/net debt ratio were to fall to below 10%. Any significant deterioration in SNCF's BCA and/or liquidity could potentially affect the group's rating.
In addition, SNCF's rating could be negatively affected by a further downgrade of the sovereign rating or as a result of reforms to the railway system, which would result in adverse changes to the group's capital structure.
An upgrade of the rating of RFF could occur only if the rating of the government of France were to be upgraded. Although unlikely under the existing framework, Moody's could raise RFF's BCA in the event of a reduction in net debt levels, resulting in an improvement of credit metrics.
A downgrade of the rating of RFF could occur if France's government bond rating were to be downgraded further, or if the levels of support and/or dependence were to diminish. The rating could also be downgraded if the EPIC status of RFF were to be lost. The BCA of RFF could come under pressure if the gap between RFF's investments and grants received were to remain high and/or its liquidity profile were to weaken . In addition, reforms to the railway system, which would result in adverse changes to the group organisation, could also exert downward pressure on RFF's rating.
The principal methodology used in rating SNCF was the Global Passenger Railway Companies Industry Methodology published in December 2008. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
The principal methodology used in rating RFF was the Government Owned Rail Network Operators Industry Methodology published in April 2009. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
SNCF is France's national railway operator and the manager of the country's railway infrastructure on behalf of RFF, the owner. SNCF is a 100% state-owned French public entity with autonomous management and with the special status of an EPIC. In 2011, SNCF reported total revenues of approximately EUR32.6 billion.
RFF is 100%-owned by the government of France. It was created in 1997 as an EPIC and given full ownership of the French rail infrastructure. RFF's purpose is to manage the railway property of around 30,000 km of lines. RFF had a turnover of EUR5.0 billion during 2011.
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