Although the economic shock to France from COVID-19 will linger for years to come, S&P Global Ratings estimates an earnings rebound occurred for most of the country's rated companies in 2021 and will continue into 2022.

Naturally, event risks like a conflict in Ukraine involving widespread sanctions and higher energy prices could alter the scenario of a sustained earnings recovery for 2022, but this is not part of our current base-case forecasts for corporates in France or the rest of Europe, the Middle East, and Africa (EMEA).

The percentage of stable outlooks on rated French corporates is currently above end-2019's level, before the pandemic started.

COVID-19 prompted rating adjustments in several sectors in France like in the rest of Europe, notably in food services and public catering, real estate, business services, and energy. But these took place mostly in 2020 and during the first half of 2021.

In general, we don't expect negative rating actions following the recent health restrictions announced in France: Our ratings capture the prospects of more muted growth in the early part of 2022.

Naturally, some French companies will rebound better than others. Lower government support may stress companies with unsustainable capital structures. Sectors dominated by small independent businesses, such as restaurants and nonfood retail, will likely struggle to bounce back. Sectors where the pandemic has durably altered consumer habits are also likely to face longer-lasting difficulties--not least business travel, hotels, leisure, and media, and perhaps even business-to-customer services, and office and commercial real estate. But this should largely impact small and midsize enterprises (SMEs), which are not typically rated.

We expect the trailing 12-month speculative-grade corporate default rate to average a reasonable 2.5% by September 2022 in our baseline forecast for Europe. Based on the current rating distribution, there is no reason to think that French issuers will fare worse than the European average.

Negative Outlooks Down To 12% From More Than One-Third A Year Ago

At year-end 2021, we publicly rated 171 French corporate entities, adjusting for a few names incorporated in neighboring Luxembourg, the Netherlands, or the U.K. that operate largely in France. (These are Stellantis N.V., Technip Energies N.V., Louis Dreyfus Co. B.V., Airbus SE, and Boost Bidco in the Netherlands; ArcelorMittal, Compact Bidco, and Albéa Beauty Holdings in Luxembourg; and TechnipFMC PLC in the U.K.).

Of the ratings on French corporates, 48% remain in the investment-grade category: 82 had a public rating of 'BBB-' or better at year-end 2021. About two-thirds fall into two groups (see chart 1), each representing about one-third of our pool:

• The first one in the 'BBB' category (56 ratings) and
• The other in the 'B' category (63).

This second category corresponds primarily to private-equity-owned companies, most often under leveraged buyout (LBO) capital structures and has grown steadily throughout 2021. In the investment-grade space, the 'AA' category is now down to three: Sanofi and L’Oréal, both stand-alone, and SNCF, the national rail operator, thanks to state support.

A number remain in the 'A' rating category: Unsurprisingly, these include a few government-related entities such as RTE, ADP, and Airbus. Still, within the 'A' category, we also rate several French groups that have a clear international dimension, robust balance sheets, and resilient cash flow (for instance, well-established names like LVMH, Schneider, Legrand, Michelin, L'Air Liquide, Kering, Dassault Systèmes, TotalEnergies, and Vinci).

The lower 'A' category also includes more domestic names that proved rather recession-proof, like motorway operators ASF and Cofiroute. At year-end 2021, almost 78% of the ratings on French corporates carried stable outlooks (see chart 2), significantly up from a low 60% at year-end 2020. The share (78%) of stable outlook also happens to be better than before the pandemic started (67% at year-end 2019).

At end-December 2021, only 12% carried negative outlooks, which is a very substantial change from the situation a year ago when negative outlooks represented a high 37% of our rated portfolio. In January 2022, we revised the outlook on Atos SE, an IT company, to negative and placed the rating on EDF, the domestic power utility, on CreditWatch with negative implications, but this only altered the outlook distribution for French corporates overall by one percentage point.

Chart 1

Chart 2

Several key names in France currently carry positive outlooks, indicating the possibility of an upgrade over the coming quarters: Lafarge, Verallia, Loxam, Rexel, and Nexans, for instance, to which was added TotalEnergies, the France-based oil major in December 2021.

Overall, the net negative bias for France (-2%, calculated as the difference between the percentage of negative and positive outlooks) is even slightly better for the country than the one at the pan-European level (-4%).

Key Rating Movements In 2021

The ratio of upgrades to downgrades was a solid 1.2x for full-year 2021 in France, compared with a low of 0.14x for 2020 (see chart 3).

Chart 3

Key ratings upgrades in 2021 were on several names that benefitted indirectly from the public health situation and chose to use the extra cash flow to strengthen their balance sheets. That group includes L'Air Liquide (industrial gases), Loxam (equipment rental), Elis (cleaning services), and CMA-CGM (twice within the year, the shipping company benefitted massively from record freight rates) (see table 1). We also upgraded a few more French corporates benefiting from long-term positive structural trends, such as Paprec, a paper and waste recycling company; and Teleperformance, a customer-relationship call-center subcontractor.

Downgrades were concentrated in three sectors: oil and gas, public catering, and real estate. Our last 2021 downgrade on a French group, in September 2021, was on an IT company, Atos SE (see table 2).

Table 1

Table 2

Steady Flow Of New Ratings In 2021 In A Variety Of Sectors

We assigned 18 new ratings on French corporates in 2021 (see table 3). In the investment-grade category, we notably for the first time rated:

• Safran SA (BBB+/Stable/--), a leading manufacturer of aerospace propulsion systems, aircraft equipment, and aircraft interiors,
• SAUR (Holding d’Infrastructures des Métiers de l’Environnement (HIME); BBB-/Stable/--), the third-largest water company in the country operating long-term water concessions in France, Spain, and Portugal, and
• Argan SA (BBB-/Stable/--), a logistics real estate investment trust.

In 2021, we also assigned an inaugural new rating to Iliad Holding SAS (BB/Stable/--), the holding company of the fourth-largest French telecom operator, Free.

Other new ratings in the speculative category came from a diversity of industries with sustained activity, notably in consumer products, retail, recycling (like Derichebourg, Seche Environnement S.A.), building materials, and health care (see table 3).

Table 3

Overall, by sector, the pool of rated French corporates is highly diverse, with all key industries being represented at year-end 2021 (see chart 4). The pool is skewed somewhat toward industrial operations, although not as much as in other European jurisdictions. Manufacturing operations (including autos, capital goods, consumer products, chemicals, and aerospace and defense) represent about one-third of the French pool; it is closer to 50% in Germany and Scandinavia. The sum of service providers (including telecom, health care, retail, transportation, leisure/media and IT, in addition to business and consumer services) total about 50% of our rated portfolio and real estate is at 9%, percentages close to their share of domestic GDP.

Chart 4

Considering the distribution by environmental, social, and governance (ESG) credit indicators, the picture is slightly better for our E credit indicator on our portfolio of French rated corporates than it is for the EMEA at large (see chart 5). For instance, E-1 plus E-2 combined account for 86% of public corporate ratings in France versus 75% across EMEA. A lower proportion of names operating in sectors exposed to high environmental risks like heavy industries, oil and gas, mining and metals in France largely explains this difference.

For the G indicator, distribution for France is very similar to that at the EMEA level, with 42% of the French pool at G-3, capturing governance concerns related to private equity ownership, the LBO market being as developed in France as it is in other European countries.

We observe that several French companies, generally rated in the investment grade category, are assigned a G-1 positive governance credit indicator (for instance, well-established names like L'Oréal, LVMH, and Pernod Ricard in the consumer goods industry, Schneider in capital goods, Michelin in autos, and Klépierre in real estate).

By underlying key factors, governance structure is listed as a risk driving the overall ESG credit indicators in 35% of cases in France but this simply reflects the prevalence of private equity ownership for speculative grade issuers. Climate transition risk comes second at 18%, highlighting the importance of sustaining a trajectory to cut greenhouse gas emissions for many names in the country.

Chart 6

Credit Trends And Credit Metrics Forecasts

On an aggregated basis (adding all the company-specific forecasts that we have made for rated corporates based in France), we estimate 2021 revenue rebounded almost to the 2019 level, so broadly in line with the pre-pandemic basis (see chart 7). That measure is obviously an aggregate and real divergences by sector will persist for some time. Full-year figures for 2021, once available for most French groups, are likely to show that sectors like transportation, hospitality, media, and leisure are trailing behind. A recovery should gather momentum this year, and our global forecasts foresee a 6.4% rebound in sales for rated French corporates in 2022.

Recently, the fast-spreading omicron variant has sapped some economic momentum, principally through reduced mobility, staff shortages, and a dip in consumer confidence. In terms of sectors most sensitive to restrictions, such as air travel, we think this will likely weigh on the positive momentum gained in the second half of 2021. However, indications from the countries earliest into the wave are that the variant is less severe, with lower hospitalization and mortality rates. This gives grounds for optimism that restrictions may be eased relatively quickly.

In parallel with the recovery in sales, French corporates are likely to restore EBITDA margin for 2021 through cost-saving initiatives and higher prices. And we foresee further improvement for 2022 (see chart 8). We note that until now, French rated issuers have largely been able to pass through higher costs from rising energy prices or supply chain disruptions to their final customers. That ability is likely to be further tested in 2022.

For some individual companies, several factors like prolonged supply chain disruptions, unmitigated rising energy prices (less likely in France than in some other countries, at least for power) and a catch-up in wages in particular, could all weigh on profitability measures this year But at this stage, we don't consider that this will derail the overall improvement trend that we forecast on an aggregated basis.

Against that backdrop of restored earnings on an aggregate basis, our debt index for French rated issuers at year-end 2021 should be no higher than 1.8% above the year-end 2019 level (see chart 9). French companies continued to borrow throughout 2021 but obviously, not all has been spent. Cash piles have risen and, on an S&P Global Ratings-adjusted basis (that is, largely deducting cash held), debt for rated corporates in France should largely be stable over 2021-2023 (see chart 9). The high-yield market was very active throughout 2021 for French issuers, with many LBO companies deciding to take advantage of the extremely competitive funding conditions last year to refinance part of their debt or complete takeovers, notably in the health care sector.

While year-end 2020 was a low point for credit metrics, we estimate final figures, once available, will show an improvement in 2021and we expect a further step of similar magnitude in 2022 (see chart 10).

Chart 7

Chart 8

Chart 9

Chart 10

Overall, we expect S&P Global Ratings-adjusted debt to EBITDA to bottom out by year-end 2022, returning to 4.2x from 5.1x two years earlier. Adjusted funds from operations to debt should show a similar trend.

Reasonably robust financial results for 2021 and a sound recovery in 2022, with weaker demand momentum during first quarter, are embedded in our current ratings. Despite the uncertainty the pandemic is causing, we do not foresee a risk of a number of negative rating actions on French corporates for now. More likely, rating actions will be based on sector- and company-specific factors.

Default Expectations

At year-end 2021, we rated 19% of speculative-grade French companies 'B-' or lower, which compares favorably with a 30% average across Europe. By then, only four names were in the 'CCC' category, whose capital structures we considered fundamentally unsustainable. Of those included is Europcar, currently on CreditWatch with positive implications, to be taken over by a consortium led by Volkswagen (table 4).

Table 4

Overall, S&P Global Ratings expects the European trailing 12-month speculative-grade corporate default rate to reach a reasonable 2.5% by September 2022 in its baseline forecast, from 1.8% at end-December 2021, on a trailing 12-month basis (for more information, see "The European Speculative-Grade Corporate Default Rate Could Reach 2.5% By September 2022," published on Nov. 18, 2021). Based on the current rating distribution, there is no reason to think that French issuers will fare any worse than the European average.

Related Research

• Ratings Weekly Digest, Jan. 26, 2022
• Global Corporate Defaults Drop Nearly 70% In 2021, Jan. 10, 2022
• Where Is The Wage Inflation? Not In Europe, Dec. 16, 2021
• Latest European Economic Snapshots Show A Robust Expansion Ahead, Dec. 6, 2021
• Global Credit Outlook 2022: Aftershocks, Future Shocks, And Transitions, Dec. 1, 2021
• Credit Conditions Europe: Reining In As Full Recovery Nears, Dec. 1, 2021
• Climate Risks | How Far Will They Affect Credit? Dec. 1, 2021
• COVID-19 | Pandemic To Endemic? Dec. 1, 2021
• Eurozone Economic Outlook 2022 Takes A Look Inside The Virus-Rattled Recovery, Nov. 30, 2021
• The European Speculative-Grade Corporate Default Rate Could Reach 2.5% By September 2022, Nov. 18, 2021