DBRS Morningstar Confirms Caisse d’amortissement de la dette sociale (CADES) at AA (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed Caisse d'amortissement de la dette sociale (CADES) Long-Term Issuer Rating at AA (high) and the Short-Term Issuer Rating of R-1 (high). The trend on both ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
CADES ratings are aligned with those of the Republic of France (AA (high), Stable). DBRS Morningstar considers that CADES benefits from explicit support arrangements from the French government. CADES' ratings are underpinned by (1) the status of CADES as a national public agency ("établissement public national à caractère administratif" - EPA) created by the French State by ordinance dated 24 January 1996; (2) the ultimate responsibility of France to ensure the solvency and the liquidity of CADES; (3) the essential role of CADES for France and its social security system; CADES benefits from a specific pledge of resources and is explicitly authorised to borrow in order to ensure the long-term funding of the cumulated deficits of the French social security system; and (4) the ability of France to support CADES in a timely manner if ever needed, primarily through the French Treasury Agency ("Agence France Trésor" - AFT) but also potentially through the State government debt fund ("Caisse de la dette publique" - CDP). DBRS Morningstar views the French government commitment towards CADES as credible, thanks to the strong institutional environment in France.

CREDIT RATING DRIVERS
CADES' long-term rating could be upgraded if France's long-term rating is upgraded.

CADES' ratings could be downgraded if any or a combination of the following occur: (1) the French sovereign rating is downgraded; or (2) a change in the status of CADES translates into a weakening of the ultimate responsibility of the French State regarding its solvency and liquidity.

CREDIT RATING RATIONALE
CADES, Pillar of the French Social Protection System, has seen its Essential Role for the State Revived Since the COVID-19 Outbreak

The financing of the French social protection system, partly through recourse to financial markets, is notably organised around three large entities: Agence centrale des organismes de sécurité sociale (ACOSS) and CADES regarding the social security per se and Unedic which manages the unemployment insurance scheme. ACOSS is principally in charge of ensuring the centralised treasury management of the national funds in charge of the social security's general scheme (SSGS), by covering the short-term funding needs of the system. CADES' mission is therefore to refinance long-term and repay the debt accumulated by the SSGS and the Elderly Solidarity Fund ("Fonds de Solidarité Vieillesse" - FSV). This debt is transferred to CADES by ACOSS following the French State's decisions. This critical role of CADES has been confirmed and strengthened by the sharp increase of the financing needs of the French social security due to the Coronavirus Disease (COVID-19) outbreak. Indeed, the balance of the SSGS and FSV reached its highest historical deficit in 2020 at EUR 38.7 billion. Thanks to the strong recovery of the French economy in 2021 and the favorable situation of the labor market in the last two years, the deficit gradually decreased to reach EUR 18.8 billion in 2022. According to the May 2023 report of the Social Security Commission, this declining trend should accelerate in 2023 with a deficit anticipated at EUR 6.2 billion, mainly driven by growing revenues thanks to the 5.6% increase of aggregate taxable payroll and the EUR 10.7 billion cut in COVID-19 related healthcare expenditure. Nevertheless, the deficit would remain much higher than its pre-COVID-19 pandemic level, standing at almost balance in 2018 and 2019, following a decade of continuous improvement.

The State is Ultimately Responsible for CADES' Solvency and Liquidity

Given the EPA status of CADES, DBRS Morningstar considers that the Republic of France is ultimately responsible for its solvency. In case of dissolution, CADES' assets and liabilities would revert back to the French State or another government-related entity. On top of the common framework applicable to national public agencies, CADES benefits from supplementary legal protection which ensures it a complementary commitment from the State, as per article 7 of the ordinance of 24 January 1996. If CADES was not able to honor all of its commitments, it would be granted new resources, probably with a tax base as resilient as the one of its current revenues, the CRDS (Contribution dedicated to the Repayment of Social Debt) and the CSG (General Social Contribution). Moreover, DBRS Morningstar considers that the Republic of France would intervene in a timely manner to support CADES in order to avoid any reputational risk for other EPAs and its own creditworthiness.

CADES is under Central Government Supervision and Benefits from a Dynamic and Diversified Debt and Liquidity Management

CADES' governance is under the central government's supervision via the Ministry of Economy, Finance and Industrial and Digital Sovereignty, notably the Minister delegated to Public Accounts, as well as the Ministries in charge of Social Security, notably the Ministry of Health and Prevention. CADES' borrowings are subject to the approval of the Ministry in charge of Economy and Finance. For 2023, CADES is planning an annual medium- and long-term borrowing program of EUR 25 billion, versus EUR 38.1 billion in 2022. The drop in the borrowing program is mainly due to the EUR 13 billion decrease in the amount of debt to be taken over by CADES this year compared with 2022. As of end of June 2023, CADES had already executed about three-quarters of its annual medium- and long-term borrowing program. DBRS Morningstar believes that CADES' access to diversified sources of funding, including through its social bond framework put in place in 2020, but also the pooling of its operational services with those of AFT, allow for a dynamic and diversified debt and liquidity management. This should help CADES cover its funding needs which remain significant in the best financial conditions. Moreover, CADES' issuances are eligible for the European Central Bank's (ECB) Public Sector Purchase Programme (PSPP) and Pandemic Emergency Purchase Programme (PEPP), which strengthens investors' interest further. DBRS Morningstar considers that the end of the net asset purchases under the PEPP as of end of March 2022 and the PSPP as of end of June 2022 has had a limited impact on CADES thanks to its credit strengths, including its strong access to financial markets.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis. Rating actions on France are likely to have an impact on this rating. ESG factors and their effect on the credit analysis of France are discussed separately at https://www.dbrsmorningstar.com/issuers/14372.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

RATING COMMITTEE SUMMARY

The main points discussed during the Rating Committee include the relationship between the French central government and CADES, the role of CADES since the COVID-19 outbreak, CADES’ 2022 financial performance, the Social Security Financing Bill for 2023, the impact of the April 2023 pension reform on the social security financial trajectory, CADES’ 2022 funding results and CADES’ 2023 funding strategy.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Government Related Entities (28 February 2023) https://www.dbrsmorningstar.com/research/410361/global-methodology-for-rating-government-related-entities. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for these credit ratings include the analytical information provided by CADES, CADES’ June 2023 Investor Presentation, CADES’ 2019-2022 annual reports, Social Security Accounts for 2011-2022, Social Security Financing Bills for 2021-2023, Revised Social Security Financing Bill for 2023, 2022 Law of Approval of the Social Security Accounts and the May 2023 report of the Social Security Commission. DBRS Morningstar considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417497.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mehdi Fadli, Senior Vice President, Sovereign Credit Ratings
Rating Committee Chair: Nichola James, Managing Director, Sovereign Credit Ratings
Initial Rating Date: July 23, 2021
Last Rating Date: July 22, 2022

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