French banks and leverage availability – Weathering the storm?

It has certainly been a tough week for three of France's largest banks. Burdened by their exposure to Greek debt and general fundraising difficulties, Société Générale (SocGen) and Crédit Agricole (CA) saw their Moody's rating downgraded by a notch to Aa3 and Aa1 respectively. BNP Paribas (BNP) will keep its Aa2 rating for the time being, but Moody's will keep the bank under review.

The news did nothing to improve the banks' trading difficulties. SocGen is the hardest hit, with its current share price registering a 55% drop compared to the beginning of the year. Share prices for CA and BNP have fallen by 42% and 40% respectively over the same period.

Things might be choppy at the moment, but both the banks themselves and the French central bank were quick to put the downgrades into perspective. "French banks have an excellent rating, the same level as other major European banks including HSBC, Barclays, Deutsche Bank and Credit Suisse," central bank governor Christian Noyer told French radio station RTL on Wednesday. Meanwhile the banks acknowledged Moody's evaluations but highlighted their structural strengths in a bid to reassure investors.

Yet, despite experiencing a troublesome year, the three banks are still in the top five debt providers for French LBOs in 2011 according to unquote" data. CA contributed to nine buyouts valued at an overall €3.95bn. SocGen supported eight deals worth a total €3.65bn - including the €2.1bn secondary buyout of SPIE - while BNP backed seven transactions worth €987m.

Will the latest developments spell bad news for French transactions? Barclays Private Equity managing director Gonzague de Blignières expects the banks to hold off writing large cheques in the next few weeks: "We need to prepare for them being less willing to provide leverage finance. This would be a shame as there is no real reason for them to do this - except maybe for SocGen."

However, he views the current situation as a temporary turbulence that should not impact PE financing in the long run: "The upside of this type of crisis is that it can be brief. This is more of a temporary lack of confidence, rather than a long-term issue, and confidence can come back just as quickly as it disappeared in the first place."

It would seem that many GPs were anticipating liquidity issues in the second half of the year and tried to complete as many deals as possible before the summer - France witnessed a strong second quarter, outpacing the rest of Europe both in terms of dealflow and overall amounts of equity invested. GPs currently signing deals off could face tougher lending committees in the coming weeks, but the setback should not significantly impact overall French activity in 2011.

"Private equity firms have the luxury of not having to do ten deals a day - they can definitely survive a fortnight of uncertainty and tougher lending conditions", continues de Blignières. "That said, some operations might take longer to be finalised, and some assets might be pulled off the block for the time being."

The current credit market is still highly volatile, and the effect the downgrades will have on CA's and SocGen's lending ability has yet to be fully measured. French GPs might be able to shrug off a touch of frost, but things might get more complicated in 2012 if France's largest lenders fail to regain their investors' confidence in due time.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• France
• Buyouts
• France
• Société Générale Securities Services
• BNP Paribas