Rating action

Scope Ratings GmbH (Scope) has today assigned long-term issuer and senior unsecured debt ratings of AA in both local and foreign currency to Caisse d’Amortissement de la Dette Sociale (‘CADES’, or ‘the agency’), with a Negative Outlook. Scope has also assigned short-term issuer ratings at S-1+ in both local and foreign currency, with a Stable Outlook.

The latest information on the rating, including rating reports and related methodologies, is available here.

Summary and Outlook

The AA rating of CADES reflects the following drivers:

• Integration with the public sponsor: CADES’ credit quality reflects its strong integration with its public sponsor, the French Republic (AA/Negative), resulting from: i) a highly protective legal status as a public administrative agency exempted from rehabilitation and court order liquidation proceedings; ii) a highly strategic mandate by refinancing and amortizing debt arising from the accumulated deficits of the social security administrations; and iii) a large and stable funding base via earmarked social security contributions and dedicated revenue that are protected by law to fully repay ring-fenced social debt. As a government related entity (GRE), CADES plays a unique role in France’s welfare state, securing the financial sustainability of the social security system, which is a constitutional responsibility of the French state.
   
• Control, regular support and likelihood of exceptional support: CADES’ credit quality benefits from the joint supervision from the Ministry of the Economy, Finance and Industrial and Digital Sovereignty, and the Ministry of Solidarity and Health, exerting tight control and oversight on the agency’s operational and financial activities, in addition to the French parliament, Court of Audit, and Constitutional Council. By ensuring the overall financial sustainability of France’s welfare state, CADES’ role substantially raises the likelihood that the French government would provide exceptional support in the unlikely scenario of financial distress.
   
• Stand-alone fundamentals: CADES’ business risk profile is underpinned by a robust funding model, whereby revenue streams are primarily made up of earmarked revenue that are protected by law. Moreover, the government is required to allocate additional resources in the event of a revenue shortfall. CADES’ financial risk profile benefits from low funding costs, a low-risk debt structure and excellent market access.

The Negative Outlook reflects Scope’s assessment that risks to the ratings are skewed to the downside over the next 12 to 18 months. The Outlook on CADES mirrors the Outlook on the French Republic.

The ratings could be downgraded if: i) the long-term ratings of the French Republic were downgraded; and/or ii) changes in the legal framework led to a notably weaker government support.

Conversely, the Outlook could be revised to Stable if: i) the Outlook on the French Republic was revised to Stable.

Rating rationale

The first driver of the AA rating is the high level of integration of CADES with the French Republic (AA/Negative), which underpins Scope’s adoption of the ‘top-down’ approach to assign the ratings.

Established in 1996 by the central government, CADES is a French public administrative agency (“Etablissement public à caractère administratif", EPA) with a mandate to refinance and repay the debt accumulated by social security administrations. As an autonomous central government entity, CADES is under the joint supervision of the Ministry of Economy, Finance and Industrial and Digital Sovereignty, and the Ministry of Solidarity and Health. CADES operates exclusively on behalf and under the control of the French government, and benefits from a highly protective legal status. In case of dissolution, CADES’ assets and liabilities would be transferred to the French state, which is responsible for its solvency and liquidity. Finally, CADES is part of social security administrations and its liabilities are included in general government debt according to the European System of Accounts.

CADES’ sole purpose is to refinance and amortize debt arising from the accumulated deficits of the general regime of social security. As such, CADES fulfils a key role in securing the financial sustainability of the social security system, the latter being a constitutional responsibility of the French state. The importance of CADES’ role further came to prominence in 2020 during the COVID-19 pandemic with the transfer to CADES of an additional EUR 136bn related to social security deficits and public hospital debt.

CADES has high financial interdependencies with the French state. Its annual amortisation and borrowing programmes are approved by the Board of Directors, which is made up of directors of the national social security funds and representatives of the French government. The agency benefits from a large and predictable funding base via earmarked social security contributions and dedicated revenue that are protected by law. Relations between CADES and its public sponsor are also regulated by an organic law aligning the lifespan of the agency to the horizon required to fully repay ring-fenced social debt. The agency’s legal framework provides that any transfer of debt to CADES must be accompanied by new revenue, underscoring strong financial interdependencies with the French government.

The second driver of the AA rating is the material link between the credit quality of CADES and that of the French state, resulting in an indicative rating level aligned with that of the French Republic.

As CADES plays a critical role by ensuring the financial sustainability of the social security system, the French state is expected to intervene in the event of financial distress. Under a hypothetical scenario where CADES were dissolved, its assets and liabilities would be transferred to the French state to ensure the continuity of social protection, entrenched in the French constitution. In such scenario, CADES’ operations are unlikely to be undertaken by the private sector as the agency operates in a non-competitive environment that is heavily regulated and controlled by the French state given its unique role and expertise. The potential socio-economic, reputational, political, and financial consequences of a highly hypothetical default of CADES are deemed to be significantly elevated for the French State and for other French public agencies. Overall, those considerations support our assessment of a very high degree of likelihood that the French state would provide exceptional financial assistance in an adequate and timely manner, if ever needed.

CADES is directly and fully dependent on its public sponsor to fund its operations and amortise ring-fenced social debt. The agency’s revenue primarily stems from earmarked social security levies – namely the “Contribution au Remboursement de la Dette Sociale" (CRDS) and a portion of the "Contribution Sociale Généralisée" (CSG), alongside a fixed annual transfer from the “Fonds de Réserve pour les Retraites” (FRR) – ensuring large and predictable funding flows. Overall, CADES’ legal framework ensures timely and consistent financial support from the French state. Crucially, the law establishing the agency provides that the government must take the necessary measures for CADES to meet its obligations in a timely manner in the event where allocated funding were insufficient.

CADES plays a critical role to ensure the refinancing of social security debt with about EUR 388bn transferred since 1996 as of end-2023. This reflects its high strategic importance that has grown further during the Covid-19 pandemic. The Organic Law of 7 August 2020 authorized the transfer of a cumulative EUR 123bn in additional debt, of which EUR 31bn for pre-2020 social security deficits, and EUR 92bn for deficits over 2020-23. The agency has also discharged hospitals from over one-third of their debt (EUR 13bn), on an exceptional and ad hoc basis, bringing the total transfer to EUR 136bn.

Given its extensive ties with the government, Scope assesses the control and regular support of the French state to CADES as ‘High’. In addition, Scope assesses the government’s willingness to provide direct financial assistance in exceptional circumstances as ‘High’, in view of a very high strategic importance, elevated substitution difficulties and systemic implications of a hypothetical default of CADES for the French government. This underpins our assessment of the very material ties between the credit quality of CADES and that of the French Republic, which anchors CADES’ AA/Negative long-term ratings.

Finally, the rating incorporates an assessment of CADES’ stand-alone fundamentals, as captured by Scope’s supplementary analysis of the agency’s business and financial risk profiles, which has not led to an adjustment of the indicative rating, for a final rating of AA.

CADES’s robust business risk profile is supported by its solid funding model, whereby its resources are protected by law and automatically transferred from administrations in charge of collecting social security contributions and taxes (e.g., ACOSS, Directorate General of Public Finances). The bulk of revenue is derived from taxes levied on ‘activity’ (e.g. wages and similar revenue) and ‘replacement’ (e.g. retirement pensions, unemployment benefits) and ‘capital’ (e.g. rents, real estate capital gains) incomes. This supports the dynamism and predictability of CADES’ revenue, in view of the low cyclicality of these income streams and high degree of correlation with France’s nominal GDP.

As per the Ordinary Law of 7 August 2020, the French parliament agreed to lower the portion of CSG allocated to CADES to 0.45 percentage point from 2024 onwards to fund the fifth branch of the social security system centred on autonomy, and to reduce the annual transfer received from the FRR to EUR 1.45bn, effective from 2025. This decision structurally lowers the resources of CADES, in turn reducing its amortization capacity. CADES’ expenditures are primarily comprised of interest paid on debt issued on capital markets. Total cost of debt, including interest paid and fees on bonds, amounted to nearly EUR 3bn in 2023, or a 47% increase from 2022.

CADES’ financial risk profile benefits from low funding costs, very strong market access, conservative debt management practices and robust liquidity support mechanisms, which balance risks related to elevated financial debt (EUR 152bn as of end-2023). CADES’ excellent market access is anchored by its highly diversified range of funding instruments, which underpins its ability to attract various types of investors and anchors its funding flexibility. As a leading issuer of social bonds, the agency is able to attract very strong demand from ESG investors. CADES’ financial profile benefits also from a low-risk debt structure, reflecting an absence of exposure to foreign currency risks, manageable vulnerability to interest rate fluctuations and favourable maturity structure. Finally, CADES has access to sizable external liquidity lines (available amounts totalling EUR 1.2bn) and to effective liquidity support mechanisms from the French government, which considerably strengthen the agency’s liquidity position.

While Scope assesses the amortisation trajectory presently projected by CADES (expected to be finalised by 2033 at the latest) as robust and credible, in line with CADES’ sophisticated stress testing and conservative financial management practices, the persistence of deficits of the French social security system raises the likelihood that further transfers of social debt will be authorized in the coming years. Nevertheless, CADES’ legal framework guarantees that any additional debt transfers would be matched by an increase in allocated resources thus ensuring the sustainability of the agency’s financial model until the full redemption of ring-fenced social debt.

Qualitative Scorecards (QS1 and QS2)

Scope applies a top-down approach (QS1) in assessing the creditworthiness of CADES, which takes the public sponsor’s rating (French Republic: AA/Negative) as the starting point and then potentially negatively adjusts it based on the assessment of: i) control and regular support; and ii) likelihood of exceptional support (QS2). The approach also includes a supplementary analysis of the entity’s business and financial risk profiles.

The adoption of the top-down approach (QS1) reflects the strong integration between CADES and its public sponsor, the French Republic, resulting from: i) ‘High’ integration assessment for CADES’s legal status; ii) a ‘High’ integration assessment regarding its purpose and activities; and iii) a ‘High’ integration assessment on financial interdependencies.

Scope assesses control and regular government support for CADES as ‘High’ (QS2) as a result of: i) the ‘High’ government control over CADES’ strategic and operational decision-making; ii) the ‘High’ control over its key personnel, governing and oversight bodies; and iii) the ‘High’ ordinary financial support.

Scope assesses the likelihood of exceptional support to be ‘High’ (QS2), reflecting: i) a ‘High’ assessment for strategic importance for the public sponsor; ii) ‘High’ substitution difficulty; and iii) ‘High’ assessment of the socio-economic, reputational and financial default implications in the event of a hypothetical default of CADES.

The assessments under QS1 and QS2 result in an indicative rating of ‘aa’ for CADES. The supplementary analysis of stand-alone business and financial risks has not led to any adjustment to the indicative rating, resulting in a final rating of AA/Negative.

These results were discussed and confirmed by a rating committee.

Factoring of Environment, Social and Governance (ESG) 

ESG factors material to CADES’ credit quality are captured by Scope’s rating approach through several analytical areas.

Scope's AA rating for the French Republic, CADES’ public sponsor, includes an appraisal of ESG factors, which are weighted at 25% overall per Scope's ‘Sovereign Ratings’ methodology.

Scope assesses social factors as relevant and positive for CADES’ ratings. The agency has a unique role to ensure the sustainability of the French welfare state, through its mission of refinancing and amortising debt arising from the accumulated deficits of the social security administrations. The importance of its mission was further displayed in the context of the Covid-19 pandemic.

CADES introduced its social bond framework in 2020, designed according to the Social Bonds Principles of the International Capital Market Association. Eligible debt to be financed via social bonds relates to the social security deficits transferred from 2020 onwards. The governance of the social bond programme is operated via a Social Bond Committee in charge of assessing and approving the selection of the eligible social deficits of the various regimes. The impact of social bonds is assessed via their contribution to the performance of the social security system. From September 2020 to December 2023, CADES issued about EUR 115bn of social bonds, to cover eligible debt of around EUR 111bn as of-end 2023.

Finally, governance factors are relevant to CADES' ratings, and are included in the assessment of integration with the French Republic and in the assessment of CADES’ stand-alone profile. These factors are supported by a robust governance structure, strong oversight mechanisms and a conservative approach to financial management.

Rating Committee
The main points discussed by the rating committee were: i) integration of CADES with its public sponsor, the French Republic, including governance, decision making, strategic importance and financial interdependencies, and ii) CADES’ financial and business risk profiles, including its liquidity and debt structure.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Government Related Entities Rating Methodology, 15 July 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 June 2024.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

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