Playing it right in Asia

Caisse d’Amortissement de la Dette Sociale, better known as Cades, is a French public agency. Although the French state does not explicitly guarantee its debt, it bears ultimate responsibility for Cades’s solvency, according to credit rating agencies Fitch and Standard & Poor’s.

The organisation has already popped up on the radar screens of some Asian investors and they have enthusiastically subscribed to its recent debt issues in their quest for low-risk yield. Now Cades is looking to tap them for even more as it seeks to cast a wider net for funds.

Historically the bonds raised by the Paris-based sinking fund — an entity formed by the French government in 1996 to periodically set aside money for the gradual repayment of public debt — have primarily been denominated in euros. But Cades has increasingly diversified into other currencies such as the US dollar, chasing cash-rich investors across the globe, most notably in Asia, Patrice Ract Madoux, chairman of Cades tells FinanceAsia.

Cades’s current goal is to redeem and repay over €200 billion worth of French social security debt by 2025. So far the institution has paid off around €84 billion of debt using two main funding sources: local taxes and international bonds.

Asian investor interest in Cades’s fixed income instruments has surged of late compared to the period post-2008 financial crisis. They have subscribed to around half of the new bonds issued this year, up from 17% in 2009, data provided by the organisation shows.

The reason for the improvement in sentiment is simple: France offers good yield pickup versus other investment-grade European sovereigns, says Madoux. For example, the spread for 10-year bonds between AA-rated France and AAA-rated Germany is around 50bp-60bp, according to Bloomberg data.

“The spread difference between both countries is viewed positively by investors because if you buy a French bond, the risk is very similar to the risk of Germany’s,” Madoux said. “Given the low [interest] rates environment in Europe, the additional pickup is rather significant and meaningful for Asian investors.”

Such strong Asian demand can be seen in Cades’s latest offerings. In March, Asian investors accounted for 51% of sales as the public agency issued a $3 billion 10-year bond paying a coupon of 3.375%. In February, Cades sold a €5 billion ($6.9 billion) five-year offering with a 1.125% coupon — its largest Eurobond since its inception. Asian investors took up 49% of the transaction, which was executed in less than 24 hours.

“We have a strong demand from Asian investors and we do hope that this will continue in the coming months,” Madoux says, noting how Cades has also diversified into local Asian currencies including the Hong Kong, Aussie and New Zealand dollars and Japanese yen.

“We are now doing one-third of our funding programme in non-euro currencies to answer the demand of investors,” he says, underlining Cades’s determination to capture the rising regional interest in French quasi-sovereign debt. “We have done a lot of roadshows in Asia by visiting a large number of central banks and institutions in the region.”

Cades — its name translates as "social debt sinking fund" in English — sets out an annual funding programme each year, according to the Social Security Financing Act. For 2014, the government agency has set a financing target of between €15 billion to €18 billion. Year-to-date, it has raised around €12 billion.

Looking beyond ratings
Standard & Poor’s was the first rating agency to axe France’s AAA-rating back in January 2012. Moody’s followed suit in November, and the country is now on the agency’s negative outlook for another possible downgrade.

In a note in January, Moody’s said its decision to maintain a negative stance was driven by the continued reduction in the French economy’s competitiveness and a further deterioration in the French government’s financial strength.

In spite of this pessimistic outlook, the eurozone’s existential crisis has seemingly passed and investors are a lot happier these days to hold French debt at tight levels. “We are quite well known by European and Asian investors, so they have kept great confidence in our bonds even if the rates at which we are issuing right now are rather low,” says Cades’ Madoux. “European sovereigns are in better shape than they were a few years ago.”

Last year, the 10-year benchmark for French debt reached a historic low of 2.23% compared to an average of 4.45% for the period 1998-2007. Since the beginning of 2014, the average has been 2.35%, according to Bloomberg.

Moody’s also highlighted France’s currently modest interest burden relative to total government revenues, which it said was supportive of the country’s credit rating.

France receives €16 billion worth of taxes from the French population, which in 2013 was used to fund the country’s annual debt interest of only €3.4 billion. The rest is used to pay down the social public debt, notes Madoux.

“We are receiving four times more taxes than we have interest to pay to investors,” he says. “We have a specific system of receiving large amounts of tax in order to amortise the debt, and it’s a system that has worked and continues to work quite well for France.”

Cades’s $84 billion reduction in French social public debt since 1996 is equivalent to about 4% of gross domestic product. When the interest saving on the amortised debt is taken into account the reduction equates to more than 5% of GDP, adds the organisation.

“I do consider that in the coming years our lives should remain rather comfortable, and I think investors in Asia will appreciate that,” Madoux says.