How France’s Mid-Market is Faring in Tough Economic Conditions
by Claire Mauduit-Le Clercq, Associate Director, Mid-Market Evaluation; Corporate Ratings EMEA, Standard & Poor’s Rating Services and Alexandra Krief, Director, Head of Mid-Market Evaluation & Credit Estimates, EMEA, Standard & Poor’s Ratings Services
While French mid-market firms have adopted prudent financial strategies since the financial crisis, Standard & Poor’s analysts Claire Mauduit-Le Clercq and Alexandra Krief discuss how pressured competitiveness and stagnant investment levels are inhibiting France’s economic recovery, and how French midsized companies must seek alternative funding sources to fill the gap left by banking disintermediation.
Economic forecasts show that France is lagging behind an already slow European recovery – driven by an overall decrease in manufacturing output. This production loss – combined with a weak economy – means that French midsized companies are hesitant to kick-start investment programmes. Yet despite the absence of substantial funding growth, we predict that the French mid-market sector will need to raise around €690bn of debt in the next five years, mainly related to refinancing needs. And with ever increasing banking disintermediation, these firms will need to look outside to complement traditional sources.
One option is to tap private placement and direct lending markets, which have begun to help French midsize companies diversify their sources of funding. However, mid-market firms will need to improve transparency around their credit quality if they want to attract this kind of investment.
There are several factors contributing to weak economic growth in France. One factor is rising labour costs – up by 30% since 2000 – encouraged by the increase in the General Social Contribution (CSG) tax, which, in turn, has contributed to weaken French companies’ competitiveness, affecting the whole industrial base.
Severely hit during the economic crisis, manufacturing production in France is yet to regain its pre-crisis output level, unlike Germany which managed to by 2013. Indeed, last year France witnessed a decrease in manufacturing output of 0.9% year on year.
In addition, low investment levels are exacerbating the problem. Regarding the investment component of French GDP growth, we are expecting a low contribution of 0.8% at the end of 2014 and 1.4% in 2015, which is lower than elsewhere in the Eurozone. This trend can be explained by the relatively low importance placed on capital-intensive industries in France.
These factors contribute to the low growth expectation for France’s GDP of 0.5% by the end of this year, which compares poorly to expected growth of 1.8% for Germany and 3.1% for the UK.
Conservative financial policy
Despite this sluggish economic outlook, prospects should gradually improve for the French mid-market. While the profit margins of French midsize corporates have been under pressure since 2007, these firms have displayed more conservative financial profiles than their peers elsewhere in Europe – providing robust cash and equity buffers as well as financial resilience during tougher times.
Since the financial crisis, French midsize companies have been reinforcing their balance sheets by keeping their leverage as well as their interest expenses (through controlled debt level) under control. In addition, they have adopted prudent financial strategies, helping them to maintain high cash levels. Leverage patterns show that midsize French corporates average a lower debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) ratio than their European counterparts (see chart 1).