In the years leading up to Covid-19, French corporate debt boomed. This was in marked contrast to its steady decline, as a proportion of the economy, everywhere else in Europe. Much of this was because of the unusually high and rising propensity of French firms to take on leverage to make acquisitions, especially abroad.
Regulators, including the Banque de France, tried in vain to slow the build-up using prudential tools. French corporate debt surpassed 80% of GDP at the end of 2019, including more than €1 trillion in loans from French banks.
As the IMF pointed out in January, interest as a proportion of corporate income before the crisis was already much higher in France than the eurozone average.
This debt hangover is now even more of a concern. French corporate borrowing leapt by €185 billion after Covid-19, according to a Banque de France report in December.
And for most sectors – especially anything related to international travel – the revenue outlook for the next few years is considerably gloomier.
French corporate borrowing leapt by €185 billion after Covid-19
Across Europe, the pandemic has led to a spike in corporate lending: in contrast to prior crises, which have tended to result in deleveraging.
However, in France things are more acute, as French banks have rolled out higher volumes of state-guaranteed business lending than any other big European economy since the crisis began.
Meanwhile, borrowing by big businesses is especially important to listed French lenders, as mutual banks dominate the retail market, which has seen more of a slowdown in borrowing.
Reports that the ECB is threatening to slap higher capital charges on banks that take too much risk in the leveraged loan market are highly relevant to French banks.
This policy could be particularly important for lenders with relatively low capital and profit buffers, which include all the listed French firms.
Worrying
According to Barclays, the most worrying aspect of France’s oversized corporate debt for investors in the listed banks – especially BNP Paribas and Societe Generale – is what it means for their ability to grow out of the crisis, as they might normally do, through corporate lending.
Across Europe, Morgan Stanley research predicts corporate lending will stagnate this year, and only rise by 2.5% in 2022.
Corporate loan demand is already falling across the eurozone – mainly due to a 47% fall in France – according to fourth-quarter ECB data.
Companies showed a particular lack of desire to borrow for fixed investment and M&A.
Thanks to government furlough schemes, as well as tax credits and deferrals, the first lockdowns only deprived French corporates of a relatively manageable €5 billion in cash, Barclays analysts argue.
Indeed, according to Banque de France, corporate cash assets have increased almost as much as their debt since the crisis began – although that will obviously not be true for all companies.
After the autumn rebound in these stocks, Barclays’ analysis suggests more of the spring sell-off may have been justified – but because of lost revenues, rather than credit costs.
However, as the coronavirus mutates and vaccine rollouts disappoint – especially in France – these banks may have more to worry about than an absence of earnings from new buyouts.
