oOn Jan. 1, 2020, SNCF Réseau became a 100%-owned subsidiary of Société Nationale SNCF SA, itself fully owned by the French state with nontransferable ownership.
oThe rail reform was accompanied by a new "golden rule," favoring a more sustainable level of financial debt and investment plan for the company, also based on a EUR35 billion debt-relief mechanism.
oWe are therefore affirming our 'AA/A-1+' ratings on SNCF Réseau.
oWe no longer assess the company's stand-alone credit profile because we do not consider it material for the rating.
oThe stable outlook reflects that on France; in our opinion, there is an almost certain likelihood of French government support to SNCF Réseau if needed.
PARIS (S&P Global Ratings) June 24, 2020--S&P Global Ratings today affirmed its 'AA/A-1+' long- and short-term issuer credit ratings on SNCF Réseau, France's rail network manager. The outlook is stable. At the same time, we affirmed our 'AA' issue ratings on the company's debt.
We continue to equalize the ratings on SNCF Réseau with those on France (unsolicited ratings: AA/Stable/A-1+). This is because we consider the company a government-related entity (GRE) and, in our opinion, there is an almost certain likelihood that the French government will provide SNCF Réseau with timely and sufficient extraordinary support in case of financial distress.
We expect the ratings and outlook on SNCF Réseau will move in line with those on France. In addition, we believe the French government's contingent liabilities are limited, and therefore would not constrain its capacity and willingness to support SNCF Réseau in a timely manner. More generally, we do not consider the French government's general propensity to support the GRE sector doubtful.
In accordance with our criteria for rating GREs, we base our assessment of almost certain support from the French government on SNCF Réseau's:
oCritical role for the government, given its strategic mission of managing and developing the national rail infrastructure on behalf of the French government, owner of the network. We think its missions continue to be of crucial importance for the French government by ensuring mobility and supporting national solidarity and sustainable development. Also, in January 2020, SNCF Réseau took over ownership of SNCF Gares & Connexions, manager of train stations, which was previously owned by SNCF Mobilités (now SNCF Voyageurs); and
oIntegral link with the government. In January 2020, SNCF Réseau lost its EPIC status that made the French government ultimately responsible for its obligations, including financial debt. However, despite the new public limited-liability status, the French government fully owns the company through the holding Société Nationale SNCF SA and this ownership is nontransferrable. The government continues to closely monitor and supervise SNCF Réseau, notably through multiyear performance contracts and by appointing the company's CEO and chairman, together with most board members (directly and indirectly through Société Nationale SNCF SA). In our view, SNCF Réseau's debt consolidation into France's public debt further incentivizes the government to maintain tight controls over the company's financial position.
We no longer assess the stand-alone credit profile on SNCF Réseau because we do not consider it material for the ratings. This follows the implementation of rail reform on Jan. 1, 2020, in particular the state's new debt relief mechanism in favor of SNCF Réseau. In our view, this support, combined with a more stringent golden rule, will promote the deleveraging path of the company, which will not issue any further debt after June 30, 2020. In line with the group's financing policy, SNCF Réseau's refinancing needs are covered by intercompany loans with the parent company Société Nationale SNCF SA. In our opinion, the almost certain likelihood of support is not subject to transition risk, meaning that we don't believe the likelihood of government support will weaken. This is because SNCF Réseau executes strategic environmental, economic and social policies for the French government, it operates in a monopolistic position and requires state support to fund part of its large capex plan (see paragraph 20 of our "Rating Government-Related Entities: Methodology And Assumptions," published March 25, 2015).
While the French government hasn't yet spelled out how it will provide support to the rail sector against COVID-19-related shortfalls, we believe the rail reform puts SNC Réseau on stronger financial footing. As part of the reform, the French government will relieve the company of EUR35 billion financial debt (EUR25 billion in January 2020 and EUR10 billion in 2022). This will significantly reduce the company's net reported debt (EUR51.9 billion as of Dec 31. 2019, under IFRS).
The December 2019 Decree confirmed the new public limited-liability status for SNCF Réseau. The company is fully owned by Société Nationale SNCF SA and the ownership is nontransferable. The decree also affirmed the overhaul of the so-called golden rule. By law, SNCF Réseau will not be allowed to fund new investment if its net-debt-to-operating-margin ratio exceeds 6x by Dec. 31, 2026; this ratio reached 26.8x at year-end 2019, of which the EUR35 billion of debt to be taken over by the government represented about 18x. We expect the golden rule as well as the end of the Cheminot status for new hires, which accompanied the reform, will help the company maintain healthier and more sustainable credit metrics.
In the event of a sharp deterioration in its financial position due to the COVID-19 pandemic, we believe the French government will provide exceptional support to the company. This support could either be direct or indirect, through holding company Société Nationale SNCF SA.
We believe the government can support SNCF Réseau's liquidity if needed, for instance by buying its bonds and commercial paper issues through Caisse de la Dette Publique. We think this would allow for prompt and ample direct state support to SNCF Réseau in the event of financial distress.
At the same time, we believe the company benefits from Société Nationale SNCF SA's high standing in credit markets, supported by its high rating, GRE status, and solid relationships with a large number of banks.
The stable outlook on SNCF Réseau mirrors that on France. Any rating action on France would result in a similar action on SNCF Réseau because we equalize its ratings with those on the sovereign.
Although unlikely, we could lower our ratings on SNCF Réseau if we believe that the likelihood of support from the French government has weakened, shown by changes to state monitoring and controls of the company. We could lower our ratings on SNCF Réseau if we downgraded France.
We could raise the rating if we raised the French sovereign rating and if, in our view, the likelihood of support for the company remained almost certain.
Related Criteria
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
oGeneral Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
oFrench Rail Network Manager SNCF Reseau Outlook Revised To Stable On Clarified Governance Controls; 'AA/A-1+' Affirmed, June 27, 2019
oBulletin: SNCF Reseau Debt Relief Details Are Clearer But Key Mechanisms Of The Rail Reform Package Remain Uncertain, Nov. 30, 2018
oFrench Rail Network Manager SNCF Reseau Affirmed At 'AA/A-1+'; Outlook Remains Negative, June 29, 2018
oHow Could The French Railway Reform Project Affect Our Ratings On SNCF Reseau And SNCF Mobilites?, March 19, 2018
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