CORPORATES
NOVEMBER 10, 2014
SNCF: Frequently Asked Questions
CREDIT FOCUS
French railways reform and possible EU regulatory changes in focus
Summary
RATINGS
Société Nationale des Chemins de Fer
Français (SNCF)
Issuer rating
Senior unsecured
Commercial paper
Other Short Term
Outlook
Aa2
Aa2
P-1
(P)P-1
Negative
KEY INDICATORS
Revenue (€
million)
EBITA margin
Debt/EBITDA
RCF/net debt
12/31/13
12/31/12
12/31/11
32,232
32,225
32,645
4.3%
5.4x
17.8%
5.4%
5.2x
14.1%
5.0%
5.2x
15.3%
Source: Moody’s Financial Metrics
Analyst Contacts:
MILAN
+39.02.9148.1100
Lorenzo Re
+39.02.9148.112
Vice President - Senior Analyst
[email protected]
PARIS
+33.1.7070.2229
Eric de Bodard
+33.1.5330.1040
Managing Director - Corporate Finance
[email protected]
» In July 2014, the French parliament approved a law that will bring France’s national
railway company, Société Nationale des Chemins de Fer Français (SNCF, Aa2 negative)
and Réseau Ferré de France (RFF, Aa1 negative), the owner of the French railway
network, under the same holding company, but with separate operations. Although some
aspects of the reform – in particular regarding the financial effect of the transfer of certain
assets from SNCF to RFF – still need to be clarified, we think the changes, which come
into effect in January 2015, are unlikely to have any major impact overall on SNCF’s
rating in the short term.
» In the long term, SNCF’s creditworthiness could actually benefit. The French railway
reform could improve coordination between the infrastructure manager and SNCF,
potentially leading to more favourable network access fees further down the line.
» We view proposed EU legislation, which aims to open domestic rail passenger services to
competition, as more of an opportunity than a threat to SNCF’s operations. Market
opening in France is likely to be very slow, potentially enabling SNCF to leverage its quasimonopolistic position in its domestic market to expand abroad. We expect SNCF’s
international expansion through its Keolis subsidiary in the local transportation segment in
the US, Asia and the UK to continue to be one of the major growth drivers for SNCF.
» Restructuring measures are likely to continue supporting a recovery in the profitability
of SNCF’s logistics business. However, increasing track access fees are likely to continue
to hurt the margins of SNCF’s high-speed train division (the TGV) in 2014 and 2015.
» Negative outlook on SNCF’s final Aa2 rating reflects the negative outlook on France’s
Aa1 sovereign rating. As a government-related issuer (GRI), SNCF’s rating and outlook
are closely aligned with those of the government of France, reflecting the high level of
support and dependence from which SNCF benefits. A sovereign rating movement would
therefore affect SNCF. A change in the strength of SNCF’s standalone credit quality
would also affect its final rating.
CORPORATES
Q1. What are the credit implications of the French rail reform for SNCF?
In our opinion, the reform reaffirms SNCF’s strategic importance to the French state, since it confirms
SNCF’s 100% public ownership and special legal status as an “Etablissement Public à Caractère
Industriel et Commercial" (EPIC). The French government will also retain the same degree of
involvement and control over SNCF’s strategy as it did prior to the reform. As a result, we do not
foresee any immediate change in our “very high” probability of government support assumptions for
SNCF. This factor, together with our assessment of a “very high” dependence, results in a five-notch
uplift in SNCF’s final rating to Aa2 relative to its baseline credit assessment (BCA) 1 of baa1, in
accordance with our rating methodology for GRIs.
Under the reform, the scope of SNCF’s activities will narrow, as part of its current activities will be
transferred to RFF (to be renamed SNCF Réseau). As a result, SNCF’s revenue will fall by around
16% and its operating profit will decline by around 11% from 2015. However, the negative effects
will be mitigated by the reduction in debt, part of which will be transferred to SNCF Réseau along
with the respective assets. Although it is unclear exactly how much debt will be transferred at this
stage, we estimate that SNCF’s leverage (adjusted debt/EBITDA) could increase by 1.0-1.5x at the
most as a result of the reform, a level that remains compatible with its current BCA of baa1. Therefore,
we think that the reform is unlikely to have any major impact on SNCF’s rating in the short term.
The main aim of the reform is to improve the efficiency of France’s railway system and the quality of
the service by integrating RFF and SNCF. The reform will also reinforce the powers that the French
rail regulator, L'Autorité de Régulation des Activités Ferroviaires (ARAF), has over guaranteeing access to
the national infrastructure on a non-discriminatory basis to SNCF’s competitors. As a result of the
reform, the French railway system will be operated by the following three entities:
This publication does not announce
a credit rating action. For any
credit ratings referenced in this
publication, please see the ratings
tab on the issuer/entity page on
www.moodys.com for the most
updated credit rating action
information and rating history.
1
2
»
SNCF Réseau (the current RFF) will own and manage the railway infrastructure, bringing
together all the activities that are currently split between RFF (as the owner of the infrastructure)
and SNCF Infra (the SNCF division dedicated to managing the infrastructure on behalf of RFF).
»
As an operator, SNCF Mobilités (the current SNCF) will manage all freight and passenger railway
operations that are currently carried out by SNCF. SNCF Mobilités will also be responsible for
the management of all national network railway stations, a role that is currently carried out by
SNCF’s Gares & Connexions business unit.
»
A newly created holding company, to be called SNCF, will strategically coordinate the activities of
the group. The new SNCF will be 100% state-owned and will fully own the other two companies.
Both RFF and SNCF will transfer some central and administrative functions (such as HR and
legal) to the new holding company, although the exact parameters of the assets and liabilities to be
transferred have not yet been clearly defined.
All the three entities will benefit from EPIC legal status, which is currently granted to both RFF and
SNCF. The French state will continue to play a key role in the railway system as it will directly
appoint the three entities’ key managers. The government will also set the operator and infrastructure
managers’ objectives through the establishment of performance contracts.
BCAs reflect our opinions of the intrinsic − or standalone − creditworthiness of GRIs.
NOVEMBER 10, 2014
CREDIT FOCUS: SNCF: FREQUENTLY ASKED QUESTIONS
CORPORATES
We estimate the following impacts on SNCF as a result of the assets’ transfer:
»
The SNCF Infra division represented 16% (€5.2 billion) of SNCF’s 2013 consolidated revenues,
11% (€318 million) of its operating profits and 12% (€3.2 billion) of its assets. The Infra division
includes both the infrastructure management activities and some commercial activities such as
contract coordination and engineering services on the open market. We expect the transfer of
these assets from the current SNCF to SNCF Réseau to be completed by June 2015 and that these
activities will be de-consolidated from SNCF’s accounts in the second half of 2014.
»
SNCF will also transfer the debt and other liabilities (i.e., pension deficit) associated with the
infrastructure and other activities to SNCF Réseau and SNCF Holding. SNCF should also receive
cash compensation (equal to the book value net of pension liabilities) related to the commercial
activities that are to transfer to SNCF Réseau and SNCF Holding. The exact amount of debt and
cash compensation has not yet been defined. However, based on preliminary estimates, we would
expect SNCF Mobilités’ total net debt to fall by €1.0 billion in 2015.
»
We would expect the transfer of administrative functions to the new holding company to be
neutral in terms of SNCF’s P&L. Although SNCF will transfer some personnel to the new
holding company, it will pay a fee for receiving these services from the new holding company
based on their cost. Based on our estimates, the value of the assets and liabilities to be transferred
to the holding is marginal. The centralisation of these functions at the holding company level
could lead to cost savings for both SNCF and RFF. However, in our view, these savings will be
marginal in the first few years, as we believe a significant personnel reduction to be unlikely.
EXHIBIT 1
EXHIBIT 2
SNCF Revenue Breakdown by Division
Gares &
Connexiones
1%
SNCF Gross Profit Breakdown by Division
SNCF Logistics
28%
SNCF Logistics
12%
Other
1%
SNCF Voyages
18%
Gares &
Connexiones
9%
SNCF Infra
11%
SNCF Infra
16%
SNCF
Voyages
28%
SNCF
Proximites
36%
Source: SNCF’s annual report
Other
17%
SNCF
Proximites
23%
Source: SNCF’s annual report
Taking into account the factors mentioned above, we forecast that SNCF’s debt/leverage ratio will
increase to 6.4-6.5x in 2015 and 2016, a ratio that is below the 7.0x threshold that could potentially
lead us to downgrade SNCF’s BCA. In contrast, we estimate that SNCF’s EBITA margin should
slightly improve, as the infra division’s EBITA margins are a bit lower than the group’s average.
SNCF’s retained cash flow (RCF)/net debt should remain in the mid-double digit percentages, a level
that would be well above the 10% threshold that could potentially trigger a negative rating action.
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CREDIT FOCUS: SNCF: FREQUENTLY ASKED QUESTIONS
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Q2. Why is there a notching differential between SNCF’s and RFF’s ratings and is
Moody’s likely to retain this differential in light of the reform?
RFF is currently rated one notch higher than SNCF. The one-notch differential reflects our view that
the very close linkage between SNCF and the French government could gradually loosen as the
French railway market gradually opens up to more competition in accordance with EU initiatives,
and that in this scenario it would be easier for the French government to provide financial support to
RFF than to SNCF. This is because some of SNCF’s activities such as freight transportation and
international passenger services are already open to competition in the EU. As a result, the French
government could run the risk of potentially contravening EU rules on state aid if it provided support
to these activities.
More specifically, our GRI methodology factors the degree of default dependence of the issuer and its
supporting government and the probability of extraordinary support from the government to the GRI.
Based on these elements and using the issuer’s BCA as the starting point, the GRI scorecard indicates a
range of possible ratings for the issuer (see Exhibit 3), although the rating committee has the flexibility
to decide on the final rating outcome, based on a range of other qualitative factors.
Our assessment of dependence is “very high” for both RFF and SNCF. Our assessment for the
probability of support is also “very high” for both entities, which is mainly a result of their special
status as EPICs. SNCF has a stronger standalone credit profile, which is reflected in its higher BCA
(baa1 versus ba1 for RFF). Although both SNCF’s and RFF’s ratings are within the rating range
indicated by the GRI methodology scorecard, RFF’s final rating (Aa1) is higher than that of SNCF
(Aa2). RFF is rated at the same level as France’s sovereign rating because we consider infrastructure
ownership and management to typically be a governmental activity, as it constitutes a natural
monopoly and is an activity of national strategic importance. In contrast, the provision of rail freight
and passenger services is a market-oriented business that can be, and in some areas already is, open to
competition with incumbent operators facing competitive from private entities.
EXHIBIT 3
RFF’s Final Rating Is One Notch Higher Than SNCF’s
Issuer name
Dependence
Support
RFF
BCA Rating
ba1
Very High
Very High
Rating
Aa1
SNCF
baa1
Very High
Very High
Aa2
Source: Moody’s Investors Service
In instances where we rate both the rail infrastructure manager and the railway operator, the rating of
the infrastructure company tends to be closer to that of the sovereign than that of the railway operator.
This reflects the differing nature of the two businesses and the higher likelihood/degree of ease for the
respective government to provide financial support for the infrastructure activity (see Exhibit 4). For
example, Belgium’s rail infrastructure manager Infrabel has an Aa3 rating – the same level as Belgium’s
sovereign rating – while the rail operator, Société Nationale des Chemins de fer Belges (SNCB), is
rated A1. Portugal is another example; Comboios de Portugal, the Portuguese national railway
operator, has a B2 rating, whereas Rede Ferroviaria Nacional (REFER), the railway infrastructure
manager, has a Ba2 rating, which is one notch below that of Portugal’s sovereign Ba1 rating. In cases
where we might have other concerns, such as a weak contractual liquidity (e.g., Comboios or Ceske
drahy a.s. (Baa3 stable), we have chosen to widen the gap with the sovereign rating for the rail
operator.
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CORPORATES
EXHIBIT 4
Rail Infrastructure Managers’ Ratings Are Closer to That of The Sovereign
Issuer
Sovereign
rating
BCA Rating
Rating
Uplift from
BCA
Difference
with
sovereign
Belgium
Infrabel
Infrastructure
Aa3
baa2
Aa3
+5 notches
0
SNCB
Railway operator
Aa3
ba1
A1
+6 notches
-1 notch
RFF
Infrastructure
Aa1
ba1
Aa1
+9 notches
0
SNCF
Railway operator
Aa1
baa1
Aa2
+5 notches
-1 notch
REFER
Infrastructure
Ba1
caa1
Ba2
+5 notches
-1 notch
Comboios de Portugal
Railway operator
Ba1
ca
B2
+5 notches
-4 notches
ADIF
Spain
Baa2
ba1
Baa3
+1 notches
-1 notch
OEBB
Austria
Aaa
baa2
Aaa
+8 notches
0
Ceske drahy
Czech Republic
A1
ba3
Baa3
+3 notches
-5 notches
NSB
Norway
Aaa
a3
Aa2
+4 notches
-2 notch
France
Portugal
Other infrastructure
Other railway operators
Source: Moody’s Investors Service
As a result of the reform RFF and SNCF will be held by the same parent company, which may appear
to present an argument for equalising their ratings, or possibly, even to have a single rating for the
entire group if the group’s financing were centralised (i.e. with the new holding company issuing debt
for the entire group). However, we expect to continue maintaining separate ratings on RFF and SNCF
as the two entities will maintain separate financing following the reform. The debt of each entity will
remain separate between SNCF and RFF, with the only “financial” link being in terms of tax
optimisation as the new holding company will apply the fiscal consolidation of all the companies.
Although the European Commission’s legislative proposals known as the “Fourth Railway Package”,
which are still being discussed by EU ministers, allow an infrastructure operator and a railway operator
to be owned by the same entity, they require Chinese walls to be built between the two, with a degree
of separation in terms of corporate governance, financing and accounting. In February 2014,
lawmakers in the European Parliament adopted amendments to the draft bill that make these Chinese
walls between the infrastructure manager and the incumbent rail operator far more permeable than
originally proposed by the Commission. However, the European Parliament backed the setting of
strict limitations on the transfer of funds (either in the form of dividends or intra-group loans) from
the infrastructure manager to the incumbent railway operator. In early October, EU transport
ministers held a policy debate on the Fourth Railway Package, which indicated that ministers hold
quite differing views on the need for stronger governance in the sector. EU ministers are planning to
discuss the bill again at a meeting this December. Both the European parliament and the EU ministers
will need to approve the bill before it can become law.
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CORPORATES
Q3. Does the opening of some markets to competition pose a major threat?
SNCF currently benefits from a quasi-monopoly in rail passenger services in France, as the market is
entirely closed to competition, with the exception of some international routes that are also operated
by some competitors (e.g., Thello, a joint venture between Transdev (formerly Veolia Transdev) and
Trenitalia, which runs trains between France and Italy). The French railway reform will not change
this situation, as national rail passenger services will continue to be regulated by a service contracts
between the government and SNCF Mobilités.
The proposed EU legislation, which aims to open domestic rail passenger services to competition,
could eventually introduce more competition into the French market and result in SNCF losing some
business. However, the liberalisation process is likely to be very slow. In its first reading of the bill,
lawmakers in the European Parliament made a series of amendments, including that public service
contracts (mainly involving regional transportation) should be awarded on the basis of a tendering
procedure from 2022 – rather than from 2019 as originally proposed by the Commission. In addition,
public authorities could in certain circumstances avoid public tenders if the incumbent operator meets
quality criteria, such as punctuality targets. Moreover, public contracts awarded before 2022 without a
public tender would remain in effect for up to ten years after the new rules come into force (i.e. until
at least 2024 or 2025). In an initial policy debate on the bill in early October, most EU transport
ministers said they considered it necessary for governments to retain the possibility to award publicservice contracts directly.
Given that the French government has so far been very reluctant to open the domestic market to
competition, we believe it will continue to protect SNCF’s monopoly to the extent allowable under
EU legislation. Therefore, SNCF could benefit from its solid position in its domestic market while
continuing to expand abroad. Indeed, the expansion into foreign market is one of the major pillars of
growth for Keolis, the international arm of SNCF Proximité, the SNCF division that operates in the
regional and local transportation segment. With revenue of €5.1 billion and EBITDA of €280 million
in 2013, Keolis is emerging as one of the major international operators in this segment. In 2013,
Keolis recorded a 2.4% increase in revenues (versus flat consolidated revenue for SNCF as a whole),
and its revenues continued to growth in 2014. In H1 2014, Keolis’s revenues rose by 3% domestically
and by 14% internationally. In addition, in 2014, Keolis was awarded, in partnership with other
operators, some important contracts, such as the Thameslink Southern and Great Northern franchise
in UK, which handles more than 20% of the total rail passenger traffic in UK, and a contract to run
the Docklands Light Rail (DLR), the automated metro in East London.
The reciprocity clause included in the Fourth Railway Package approved by the European Parliament
could pose a potential threat to Keolis’s international expansion. This clause allows public authorities
in EU member states that have adopted the EU rules to exclude operators from other EU countries
that have not adopted them from participating in their public tenders. As a result, as long as the
French market remains a monopoly, Keolis could potentially be excluded from participating in public
tenders in other EU countries. However, we do not foresee this as being a major obstacle to Keolis’s
expansion strategy as it is mainly focused on the US, Asia and, as far as Europe is concerned, the UK.
In the company’s view, the other mature European markets are less attractive because their national or
local authorities’ public budgets are diminishing.
Q4. What are the main credit challenges facing SNCF?
The deterioration in the operating performance of SNCF’s high-speed division (the TGV) and the poor
results in the freight and logistics division (SNCF Logistics, formerly named SNCF Geodis) are the
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CREDIT FOCUS: SNCF: FREQUENTLY ASKED QUESTIONS
CORPORATES
main credit issues facing SNCF. The difficulties these two businesses are experiencing adversely affected
the group’s consolidated performance in 2013, driving the decline in adjusted EBITDA (down 9.6%
from 2012 to €3.6 billion) and causing a slight deterioration in leverage (debt/EBITDA increased to
5.4x from 5.2x in 2012).
SNCF Logistics’ poorer performance was mainly due to a slowdown in global economies that has
hurt its revenues since 2007. However, SNCF’s management has reacted by cutting costs and
improving the efficiency and the positive effects of these restructuring measures are already being
felt. In H1 2014, SNCF Logistics’ revenues increased by 0.6% at constant scope of consolidation
and exchange rates, while gross margins rose to 4.3% (from 3.3% in H1 2013) and operating profit
turned positive. We expect this positive trend to continue in H2 2014 and 2015. We forecast a
further increase in operating margin towards the mid-single-digit percentages, although we expect
SNCF Logistics to remain the least profitable business within SNCF.
The deterioration in the operating performance of the SNCF Voyages division, especially in the TGV
segment, was mainly driven by the increase in track access fees. The fee is regulated based on a
mechanism that factors in both the CPI and a construction price inflation index. Between 2007 and
2013, track access costs have increased by 7.4% a year on average, an increase that was not fully offset
by similar price hikes and traffic improvements. As a result, SNCF Voyages’ operating margin declined
to 11.4% in 2013 from 12.6% in 2012. In 2014, track access fees are likely to rise again by some
4.5%, putting further pressure on SNCF Voyages’ margins. In 2015 and 2016, the increase in track
access fees will be limited to 0.65% and 0.5%, respectively, although the opening of new TGV lines
implies that total access costs will increase in absolute terms.
SNCF is implementing a number of cost savings and efficiency measures, such as improving the
utilisation rate of trains. We expect these measures to allow some recovery in profitability, with
operating margins likely to return to low-double-digit percentages in the next two to three years.
As the French railway reform should allow a better coordination between the infrastructure manager,
SNCF Réseau, and the railway operator, SNCF Mobilités, it could possibly lead to a better mechanism
for setting access fees. At present, network access fees are aimed at maximising the revenue per km for
RFF. However, this system is unsustainable as some lines are already loss-making and could be
downsized in the future (i.e. by reducing the number of daily trains on the affected lines). Lower traffic
volumes would ultimately reduce RFF’s revenues. Following the reform, the access fee mechanism
could be revised in a way that could benefit the whole system, such as by reducing the cost per train,
while at the same time optimising the total traffic and the revenue for the infrastructure manager.
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CORPORATES
Appendix
Ratings History - Société Nationale des Chemins de Fer Français (SNCF)
Aaa
Aa1
Aa2
Aa3
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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CORPORATES
Moody’s Related Research
Company Profile:
»
SNCF, June 2014 (171750)
Credit Opinion:
»
SNCF
Credit Focus:
»
Deutsche Bahn and SNCF: Peer Comparison, December 2012 (147977)
Special Comments:
»
European Railway Companies: New EU Rules Likely to Boost International Rail Passenger
Services, November 2012 (146514)
Rating Methodologies:
»
Global Passenger Railway Companies, March 2013 (136815)
»
Government-Related Issuers: Methodology Update, July 2010 (126031)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of
this report and that more recent reports may be available. All research may not be available to all clients.
9
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CORPORATES
Report Number: 176455
Author
Lorenzo Re
Editor
Victoria Knight
Production Specialist
Wendy Kroeker
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ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder
Affiliation Policy.”
For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61
003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients”
within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the
document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients”
within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity
securities of the issuer or any form of security that is available to retail clients. It would be dangerous for “retail clients” to make any investment decision based on MOODY’S credit rating. If
in doubt you should contact your financial or other professional adviser.
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NOVEMBER 10, 2014
CREDIT FOCUS: SNCF: FREQUENTLY ASKED QUESTIONS