Revolution and Reform

For weeks, news stories about strikes and protests in France over President Nicolas Sarkozy’s unwavering decision to change the country’s pension system dominated the headlines. Students took to the street like it was 1968, cars burned and thousands vented their fury over the impending changes.

But surprisingly, the furor did nothing to deter investor interest over France. On the contrary—and notwithstanding all that happened in the country itself—in a year when Europe has barely had a chance to catch its breath between the different sovereign crises that have threatened its very existence, France has actually stood out from the pack and its fixed income markets have proven themselves a safe haven in the Eurozone on several occasions this year.

[Read about France's struggle with pension reform.]

Most recently, French sovereign bonds were the beneficiaries of the flight to quality that occurred following the announcement of a $113 billion joint European Union and International Monetary Fund (IMF) bailout for Ireland, and through the year, French investment-grade corporates have also been an attractive and important part of the corporate bond market in Europe. But even at the height of the financial crisis in 2008 and 2009, demand for French bonds was high, and the first company to approach the pound sterling bond market after the collapse of Lehman Brothers, says Emmanuel Teissier, fixed income strategist at Franklin Templeton Investments, was GDF Suez, a leading French utility with a cutting edge business.

“Although French banks are in fairly good shape, they have pushed companies to approach the bond market to replace their bank facilities,” Teissier says. “That trend is not specific to France only, of course, and has been observed in many developed countries since Lehman collapsed, [but] as a result, new French companies have approached the bond market for the first time over the last two years.”

According to Tim Hall, global head of debt capital markets origination at French bank Calyon in London, the biggest French bond story is the advent of sub-investment grade issuers from France and the use they have made of the capital markets. Like their investment-grade counterparts, French high-yield issuers have realized the benefits of having both bank and bond debt on their balance sheets, Hall says, and this year the European bond markets have seen a significant number of high-yield issues—euro as well as dollar-denominated—from French corporates, almost all of which have been well received by enthusiastic investors. The list includes specialty chemical companies Rhodia and SNF Floerger Group; spirits company Remy Cointreau; car rental concern Europcar and auto giant Renault.

High-yield bonds were also a part of the funds that financed the $2 billion buyout of French frozen food company Picard by private equity firm Lion Capital, one of the few European leveraged buyouts (LBOs) this year and the biggest such deal in France since 2008.

All these bond issues did very well—in fact, Hall says, Remy Cointreau’s $272.7 million issue, which came to market in June, was well oversubscribed. “The combined benefits of Remy as an infrequent issuer, the relatively small transaction size, the company’s strong brand recognition and the non-cyclical nature of the business attracted strong investor interest, thereby enabling the bonds to price with an attractive coupon of 5.18% based on a book that was three times oversubscribed,” he says. “And although SNF is a privately held company, its $252.7 million, 8.25% bond was also very well received, largely because the company was able to weather the financial crisis with minimal deterioration in its operating performance in spite of the cyclical chemicals sector in which it operates.”

High-yield issues out of France are still a small part of overall corporate bond issuance, but fixed-income investors—whose risk appetite has been fairly strong this year—like them very much. Many French companies have been able to borrow at competitive rates, says Richard Hunter, managing director for corporate bond ratings at ratings agency Fitch Ratings in London, and firms like Renault and Peugeot, which are rated sub-investment grade but are regarded as blue-chip corporates, have been able to issue bonds on the same covenant-free terms as their investment-grade counterparts.

“Theoretically, this gives investors less protection, but it hasn’t hurt those issuers’ ability to raise debt,” Hunter says. “What’s most interesting about the recent wave of French high-yield bond issues is the relative comfort level of investors vis-à-vis the legal jurisdiction in France. Our loss severity ratings for issuers in France, unlike in Germany and the U.K., are capped to reflect the less ‘creditor-friendly’ nature of the legal regime, with more priority given by courts to supporting the issuer’s management and less priority to legal seniority of debt, but the need for yield has evidently offset investors’ reluctance on that front.”

According to Curtis Lyman, Palm Beach, Fla.-based managing director and partner of HighTower Advisors, France has been making greater strides in terms of transparency and disclosure, and in protecting junior creditors in French bond deals, and this is also encouraging investors. This year’s high-yield bonds have been issued using innovative structures in senior secured notes and junior priority notes, he says, and as French companies continue to diversify their funding sources, the innovation will continue.

Yet innovation is not new to the French corporate world: While there is a general perception of France as a country where deep-rooted social initiatives have resulted in serious government overhang, the private sector is and always has been a space apart, functioning as a highly sophisticated mechanism that investors the world over respect for its well-managed operations.