From a borrowing programme averaging €4bn–€5bn per year, Caisse d'Amortissement de la Dette Sociale was propelled into new spheres when its funding needs grew almost tenfold. The issuer, more used to selling itself as a rare gem, was suddenly pricing large benchmarks and needed to learn fast how to handle investors. Helene Durand assesses how far the borrower has come in the last year.
It was not so long ago that the Caisse d'Amortissement de la Dette Sociale (CADES) had a set lifespan extending to 2014 and a mere €4bn–€5bn to borrow in the capital markets each year, putting it in issuance volume terms more on a par with other small French agencies than the likes of the European Investment Bank or KfW.
A reform by the French government in the summer of 2004 changed all that. Indeed, under Act 2004-810 of August 13 2004 reforming the French social security system, it was stated that "CADES's lifespan has been extended past the January 31 2014 deadline, until such date as the social security transferred to it has been fully extinguished."
Not only was CADES's mission now extended indefinitely, but €35bn worth of debt was transferred to it under the same law, the amount of the social security deficits from 2002 to 2004. A first €10bn sum was transferred on September 1 2004 while the remaining €25bn was shifted on December 31. A further €15bn of projected deficits for 2005–06 will be transferred this year, and the current assumption is that the French social security will be back to equilibrium in 2007.
This meant that for 2004, CADES's needs reached a whopping €41bn – while they stand at €39bn for this year. To give an idea of scale, Spain's funding needs stand at €40bn this year, while the Netherlands' amount to €30bn. As a result, CADES had to use every funding tool at its disposal. A one-year €20bn credit facility was set up with 10 banks, bilateral lines with four banks were established for €15bn while the ceilings on its respective CP and EMTN programmes were cranked up to €15bn in each case.
Furthermore, CADES set out an active benchmark programme in both the euro straight/inflation-linked market and the foreign currency market. Before the end of 2004, the borrower had tapped the five, 10 and 15-year parts of the curve in straight euros while it priced a number of opportunistic benchmarks in US dollars and new inflation-linked issues.
Since the beginning of 2005, CADES has repeated the same pattern, also pricing three euro benchmarks and three US dollar bonds. More is planned before the end of the year.
"With the growth of our borrowing programme from €4bn–€5bn per annum, to around €40bn – including short-dated debt – it has been possible to price three large euro reference benchmarks in 2004 and 2005 while re-opening an important US dollar programme. Meanwhile, so far this year we have come back to the inflation-linked market through increases, and will continue to monitor this market closely. This growth in our borrowing has been viewed positively by investors who are seeking quasi-sovereign paper," said Patrice Ract-Madoux, CADES's chairman.
Indeed, CADES set out to raise €10bn to €15bn in straight benchmarks, €2bn to €5bn in bonds linked to French inflation, €2bn to €5bn in benchmarks transactions in foreign currencies and €2bn to €5bn in structured private placements.
The borrower is keen to get a lot of its funding out of the way as the elections of a new chairman in May could take CADES out of the market for some time. Whoever is appointed needs to get signed off by different ministers. In the past, the re-election process has taken CADES out of the market for as long as five months.
CADES was created in January 1996 as an Etablissement Public Administratif (EPA) for a single purpose: amortising the French social security debt. In total, since its inception, it was transferred €110bn worth of debt to amortise, and has amortised €26bn of this to date. CADES's revenue comes from a tax specifically set up to finance it, hence the zero risk-weighting of the borrower despite the lack of guarantee.
This tax is called Contribution au Remboursement de la Dette Sociale (CRDS) which is taken from wage income at 67%, replacement revenues at 21%, capital and investment at 10% and gambling/jewellery by 2%. In 2005, this revenue is forecast at around €5bn plus. The tax will be increased this year from 95% to 97% of gross wages, the impact of which is an anticipated extra €62m per annum.
CADES's debt is included in France's debt calculations for Maastricht purposes.