Corporate finance: France could tighten screw on leverage, says AMF head

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By:
Dominic O’Neill
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Corporate and household borrowing in France continues to outpace eurozone peers, as measures are introduced to tackle the increase.

New rules to limit rampant private-sector borrowing in France could just be the beginning if its debt binge does not calm, according to one of the country’s most senior financial policymakers.

Robert Ophèle, chair of the French financial markets’ authority, the AMF, says the French authorities “could go further” in macro-prudential tightening as French household and corporate borrowing continues to outpace eurozone peers – with corporate borrowing driven in part by leveraged acquisitions, particularly in the US.

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Robert Ophèle, AMF

Non-financial corporate borrowing in France, about 165% of GDP, is higher than in all eurozone countries except Belgium, according to the ECB. 

French and Belgian banks had the highest rate of corporate and retail loan growth in the bloc, about 8%, compared with about half that rate at German banks, according to a Deutsche Bank report late last year, although in its communication on the issue, the High Council for Financial Stability (HCSF) drew special attention to the increase in big firms’ market borrowing, up almost 50% since 2011.

Recently agreed French acquisitions abroad include Atos’ $3.4 billion purchase of Syntel, in the US IT services sector, and Axa’s $15 billion takeover of Bermuda-based XL, in insurance.

France implemented two important measures to tackle borrowing increases in recent months, both imposed by the HCSF. The AMF head is part of the council, which is led by the finance minister and central bank governor. Ophèle’s words on the issue also carry greater weight as he was chair of the local banking regulator (part of the Banque de France) before moving to the AMF last year.

In July the HCSF introduced a 0.25% counter-cyclical buffer on top of banks’ existing capital requirements and applicable from July 2019, making France the first big eurozone economy to introduce such a buffer. 

That came only a few weeks after a new cap came into force on systemic French banks’ exposures to large corporates. Big banks’ single exposure is now limited to 5% of their capital, compared with the standard 25% set out in the EU’s 2013 Capital Requirements Regulation (CRR). The cap will only apply to firms with more debt than equity, and whose interest payments are more than a third of ebitda.

Counter-cyclical buffer

While rising profits have balanced the overall rise in borrowing by non-financial corporates so far, it is the persistence of high annual increases in their market and bank borrowing – 5.1% year on year to April – that concerns the HCSF. “It’s time to reduce the pace, to some extent,” says Ophèle.

“We are looking very closely to see if the first measures will be effective. We would probably be ready to move forward if not, taking into account how monetary policy evolves.” The introduction of a counter-cyclical buffer is “at a minimum level” and “just a signal” to make sure the market takes the leverage issue seriously. The next step could be to increase the counter-cyclical buffer, he says.

Ophèle adds that the corporate exposures cap could be lowered or extended to firms with less leverage. The initial move needed five months to come in force after the HCSF proposed it in December, so that the EU could make sure other countries applied the same limits to their exposures to the same French firms.

Nevertheless, the HCSF needs to be “especially prudent”, as the tools it is using are “in the early stages of their development” and relatively untested: “You don’t want to be detrimental to economic growth,” says Ophèle.

Despite a slightly higher increase in household borrowing over the past year, that worries the HCSF slightly less, as the prevalence of fixed-rate mortgages in France removes the roll-over risk that corporates face. This reflects French banks’ traditional approach of using mortgages as a loss leader and a hook on which to sell other products, particularly insurance and asset management.

Corporate exposures cap

Corporate borrowing is also more difficult than household borrowing for the authorities to control with macro-prudential measures such as loan-to-value limits, notes Ophèle, due to corporates’ access to the bond markets and in the context of the ECB’s corporate bond-buying programme.

“Your room for manoeuvre is a bit reduced,” he says. The new corporate exposures’ cap is therefore complementary to the counter-cyclical buffer, which affects households, and small and medium-sized enterprises, as well as corporates. “Having the two is a mix that makes sense,” he says.

One limit to the cap is that it only applies to firms that are resident in France, so has little if any impact on corporations with strong links to the French financial sector but which are domiciled elsewhere. That might include French citizen Patrick Drahi’s Dutch-based Altice, whose French telecoms firm, SFR, has been the starting point for a slew of other debt-fuelled international acquisitions.

“We try to encompass every large company having real activity in France,” says Ophèle, dodging the question of whether the rules would therefore snare exposures to Altice.

Ophèle says France may have seen a more rapid increase in credit than other eurozone countries because of the relatively concentrated nature of its banking system, which he says has helped French banks be more profitable and build up more capital. It has meant French lending has been better able to keep up with demand.

“The transmission of monetary policy is working very well in France,” he says. “When monetary policy is very accommodative you should expect an increase in leverage and credit… Because of the heterogeneity of the eurozone, some countries need to keep accommodative monetary policy for longer than others. That’s why we need to mobilize these other tools.”