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
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE AND NEGATIVE OUTLOOK
-- SNCF
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.
-- RFF
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
-- SNCF
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.
-- RFF
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.
PRINCIPAL METHODOLOGIES
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.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated
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Marco Vetulli
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
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Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
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Moody's downgrades SNCF and RFF, outlook remains negative
