We consider CADES to be a government-related entity (GRE). Under our GRE criteria, we base our rating approach on CADES’:
-- “Critical” role in refinancing and paying off the accumulated debt of France’s social security scheme. In our opinion, this mission ensures it would receive adequate and timely state support if needed; and
-- “Integral” link with the French state, because CADES is integrated into the government’s policy and social security framework and is subject to close state supervision and control.
The state does not explicitly guarantee CADES’ debt. However, owing to its status as a state public agency (“Etablissement Public Administratif de l‘Etat;” EPA), the French government is ultimately responsible for CADES’ solvency. We consider that in case of need, CADES would have access to emergency funding from the French treasury, and that the treasury would ease CADES’ funding needs directly, by buying commercial paper (CP) issued by CADES, or using its debt amortization fund (“Caisse de la Dette Publique”) to buy CADES’ bonds or CP issues.
The state established CADES in 1996 for the sole purpose of refinancing and paying off the accumulated debt of France’s social security scheme. CADES’ mission is complementary to that of Agence Centrale des Organismes de Securite Sociale (ACOSS;--/--/A-1+), which is in charge of managing the social security scheme’s annual cash flows. Since 1996, the debt passed by ACOSS to CADES on behalf of social security institutions has been primarily serviced from proceeds from a specifically earmarked social security levy, the “Contribution au Remboursement de la Dette Sociale” (CRDS), and since 2009 also from a share of another social security levy, the “Contribution Sociale Generalisee” (CSG). Once all the transferred debt is paid off, CADES will be closed and the CRDS will be abolished.
CADES’ mission has been extended on several occasions over the past decade. Accordingly, its net liability position has increased significantly over time, to EUR142.8 billion on Dec. 31, 2011, from just under EUR30 billion in 2003.
In 2010, the French government decided on massive new debt transfers of up to EUR130 billion to CADES from 2011, EUR65.3 billion of which is to cover ACOSS’ accumulated deficits for 2009, 2010, and 2011. Under France’s November 2010 pension law, up to EUR62 billion of additional debt will also be passed to CADES between 2012 and 2018. This corresponds to the planned deficits of Caisse Nationale d‘Assurance Vieillesse (CNAV), a social security fund dedicated to pension payments, from 2011 until 2018. The French government projects that CNAV will achieve balanced accounts in 2018. We note that, excepting CNAV, the social security system’s potential additional deficits from 2013--especially for the fund for health Caisse Nationale de l‘Assurance Maladie des Travailleurs Salaries (CNAM)--may require additional debt transfers to CADES, depending on the funding scheme decided by the state to cover such deficits.
CADES received an additional EUR2.5 billion in debt at the end of 2011 to cover the 2009 and 2010 deficits of French farmers’ special pension fund (CCMSA). To amortize this debt CADES was entitled to receive an additional EUR220 million in 2012 from an extension of the CRDS’ and CSG’s bases and specific revenues from former tax exemptions.
The legal, financial, and oversight frameworks underpinning CADES’ creditworthiness remain unchanged. We continue to view these as adequate to secure full and prompt sovereign financial backing for all of CADES’ outstanding and upcoming obligations. The December 2010 social security finance law extended CADES’ lifespan by four years to 2025, transferred up to EUR130 billion of new debt to CADES from 2011, earmarked an increasing share of the CSG for CADES from 2011, and allocated CADES an additional tax and transfers from a social security reserve fund dedicated to pensions (the FRR). In our view, this should enable full funding of CADES’ debt service and repayment, including the massive debt transfers from 2011. CADES’ debt service will continue to be mainly financed through the CRDS and an increasing share of the CSG from 2011, together with an additional tax and transfers from the FRR.
CADES’ liquidity position is very predictable, in our view. It has excellent access to international capital markets including a EUR15 billion French CP program (“billets de tresorerie”), a EUR5 billion French Medium-Term Note (BMTN) program, and a EUR60 billion global CP program. As of Sept. 19, 2012, CADES’ drawings on these short-term programs had reached EUR23.3 billion. The programs are backed by confirmed bank lines, amounting to EUR0.7 billion, and a confirmed EUR2 billion European short-term commercial paper (ECP) notes purchase agreement with an international bank.
In case of need, we understand that CADES would have prompt access to ample funding from the French treasury which may, as stated in the Finance Law, directly buy CADES’ CP issues. CADES is eligible for this emergency funding mechanism based upon its EPA status. We understand that the French treasury may also use the state’s debt amortization fund to buy CADES’ bonds or CP issues, if needed.
The negative outlook mirrors that on France and reflects our expectation that CADES will retain its critical role to and integral link with the French state. CADES’ ability to pay its outstanding obligations depends wholly on its legal status and on the French government’s willingness to assign earmarked tax-like revenue sources to CADES. In turn, these enable adequate and timely debt coverage, either internally from CADES’ cash flows, or externally thanks to excellent access to international capital markets.
We expect the ratings on CADES to move in line with those on France. Any indication of a weakening of the government’s resolve to secure sufficient funding for CADES to service its debt would likely lead to a negative rating action on CADES. However, we currently believe that such a change in government strategy is highly unlikely.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Sovereigns and Equalized GREs Commercial Paper Rating Methodology, March 29, 2012
Caisse d‘Amortissement de la Dette Sociale
Issuer Credit Rating AA+/Negative/A-1+
Caisse d‘Amortissement de la Dette Sociale
Senior Unsecured AA+
Commercial Paper A-1+