Benoit Jolivet
Président de la CADES

Stimulated by low interest rates and an abundant inflow of liquidity, the overall trend in financial markets has been favourable. This has enabled CADES to achieve optimal funding costs and to strengthen its financial structure. As a result, CADES completed its planned funding programme for 1998 within the first half of the year.

CADES has continued to do its utmost to ensure that investors are able to manage their positions in its securities in the best possible conditions. Thus, the liquidity of several existing lines in French francs and foreign currencies has been enhanced by additional contributions.Similarly, CADES has created a new reserve of funds maturing in 2010, thereby completing its range of maturities, covering the entire yield curve. It has also launched medium-term multicurrency programmes.

CADES endeavours to remain permanently tuned in to market needs and to find imaginative ways of meeting them. A good illustration of this is the issuing of indexed amortisation bonds (OAIs) indexed to the TEC 10. These innovative structured products have been designed to meet the needs of a particular category of investor, i.e. life insurance companies with which CADES wishes to establish lasting relationships. CADES's creditworthiness should also be attractive to central bankers, who will shortly be restructuring their currency reserves and diversifying into the euro market.

In forthcoming months, CADES should continue to benefit from a combination of positive factors. First, the French government has reiterated that its objective is to balance the books of the social security system by 1999. Next, economic indicators in France and the countries that are its main trading partners are favourable. In this context, CADES's policy will be to strengthen its positioning on the euro market by using the other currencies that make up the euro. CADES will also be seeking any market opportunities to develop its euro-denominated medium- and long-term debt programme, whose flexibility makes it possible to meet specific needs in a timely and appropriate way. Finally, CADES could be led to issue bonds indexed to the inflation rate, following the issuance of such securities by the government.

The changeover to the euro  

CADES's entire debt denominated in "in" currencies will be redenominated in euros from January 4, 1999.
This should further enhance its status as a blue-chip issuer on the euro market, thanks to its top credit rating, the liquidity of its debt and its coverage of all maturities along the yield curve.

CADES's credit rating  

The credit rating agencies Standard & Poor's, Moody's and Fitch IBCA have given CADES's long- and short-term debt the best ratings:

* AAA/A1+ * Aaa/P1 * AAA/F1+

CADES's credit rating has been further enhanced by the favourable prudential treatment of its issues: like sovereign issuers who are members of the OECD, its issues benefit from a 0% Cooke ratio weighting.
They also do not affect the risk-asset ratios of mutual funds and insurance companies.

The results for fiscal 1997   

The results for fiscal 1997

As forecast, CADES's main source of funds, the CRDS income tax levy, yielded FRF25.5 billion (USD4.3 billion).
CADES's gross debt amounted to FRF207.6 billion (USD34.6 billion), and the value of its issues totalled FRF109.5 billion (USD18.3 billion).
CADES's negative net equity fell to FRF131.6 billion, thanks to a positive net income of FRF6.6 billion (USD1.1 billion).
However, this positive result needs to be put into perspective by taking into account the time given to CADES to fulfil its purpose (18 years and one month). In approving the accounts for 1997, the Board of Directors emphasised that CADES's conservative discounted cash flow forecasts confirmed that CADES should pay off its net debt by January 31, 2014.

Issuing policy in the first half of 1998 

Stimulated by low interest rates and an abundant inflow of liquidity, financial market trends were favourable. This enabled CADES to achieve optimal funding costs, to increase the duration of its debt, to broaden its investor base and to complete its product range creatively. With a volume of public issues amounting to FRF56.5 billion (USD9.4 billion) in the first half, CADES has already completed its planned issuing programme for 1998.

• Positioning on the future euro market and liquidity.
  In the run-up to the introduction of the euro, CADES issued two eurofungible multicurrency bonds made up of various tranches denominated in French francs, Deutsche Marks and Dutch Guilders.

  • The fixed rate bond at 5.125% maturing on October 25 2008 was issued in three tranches: first, FRF8 billion at 15 bp above the benchmark OAT rate; then, DEM3 billion at 18 bp above the benchmark Bund rate, subsequently increased by DEM750 million at 17 bp above the benchmark Bund rate; and finally, NLG2 billion at 18 bp above the benchmark DSL rate. Following their redenomination in euro, these tranches will be merged into a single line of over four billion euros.

  • The fixed rate bond at 5.25% maturing on October 25 2012 was also issued in three tranches.
    First, a FRF4 billion tranche at 18 bp above the benchmark OAT rate, subsequently increased by FRF2.5 billion at 14 bp above the benchmark OAT rate; next, a DEM1.5 billion tranche at 21 bp above the benchmark Bund rate; and finally, a third NLG1.5 billion tranche at 18 bp above the benchmark DSL rate.
    Once these tranches have been redenominated in euro, they will be merged into a single line of approximately three billion euros.

  • These issues should strengthen CADES's position as a blue-chip issuer on the future euro market, enabling it to provide investors with highly liquid securities.
    This was also the purpose of CADES's additional FRF800 million contribution to the reserve of issues at 6% maturing on July 25 2005.

     

• Achieving optimal financing costs
  On the international markets, CADES has launched a programme of medium-term euro-denominated note issues (EMTNs) totalling 10 billion euros, in addition to the FRF10 billion medium-term notes already issued on the home market (BMTNs).
  • This new programme should be used for both foreign currency private placements worth at least 20 million euros and public issues. Because of their flexibility, MTNs are an excellent alternative source of funds with short-dated maturities on the yield curve.

   

• Meeting the needs of specific categories of investors
  CADES was the first to issue an indexed amortisation bond (OAI). Following the immediate success of the FRF2 billion fixed rate issue at 4.71% maturing on May 11 2008 and indexed to the TEC 10, CADES promptly issued another bond of this type. The second OAI issue amounting to FRF1.5 billion at 4.6% maturing in 2010 has established a new reserve of issues maturing between the years 2008 and 2012 on the yield curve.
   

  • These structured products are amortised proportionally to changes in the TEC 10 index, in accordance with predefined rules. As such, the OAI is an excellent product for hedging against rises in interest rates, and reacts in the traditional way to cuts in interest rates.

  • OAIs are particularly suitable for the constraints inherent in asset and liability management. Thus, it provides life insurance companies with a solution to their problem of covering early repurchases: when interest rates rise, the amortisation of OAIs is accelerated, thereby generating liquidity.

    
    

• Broadening the investor base outside the euro area
  CADES has continued to diversify its investor base through placements abroad. Several bonds have been issued in foreign currencies outside the euro area.
   

  • First, CADES issued a CHF500 million bond at 2.50% maturing on March 17 2003 and a GBP250 million bond at 6.25% maturing on March 5 2008 at 35 bp above the benchmark Gilt rate. This was subsequently increased by GBP50 million at 30 bp above the benchmark Gilt rate.

  • Finally, CADES launched a second tranche of USD500 million at LIBOR -12.5 bp, as an addition to the bond maturing on December 17 1999.

    
    

• The debt structure as at August 31, 1998
  Taking into account the bonds issued in the first half of 1998, the discounted cost of CADES's debt at the weighted average rate stood at 4.82% on 31/08/1998, while the average maturity increased to 4.8 years from four.
  • After swapping, euro constituent currencies account for 74% of total debt, the US dollar 18%, sterling 5%, the yen 2% and the Swiss franc 1%.
    

Changes in Debt Structure as at August 31, 1998

Corporate communications

• To foster a dialogue with non-resident investors, CADES organised a series of roadshows in Europe (London, Glasgow, Edinburgh, Zurich, Geneva, Basel, Brussels, Luxembourg, Milan, Madrid), Asia (Singapore and Tokyo) and the Middle East (Bahrein, Abu Dhabi, Kuwait, Saudi Arabia and Dubai).

• An advertising campaign was conducted in the English language economic and financial press, emphasising the liquidity of CADES's issues.

• The updated version of CADES's web-site is accessible at the following address: http://www.cades.fr

Tighter procedures for monitoring CADES   

The ministerial order of May 22 1998 clarifies the procedures whereby the government monitors CADES's finances. It stipulates that the Board of Directors of CADES is responsible for drawing up internal control procedures, in accordance with the generally accepted principles and rules applicable to credit institutions. The Board of Directors ensures compliance with these provisions, notably as regards analysing the risks run by CADES when entering into market transactions. The ministerial order also stipulates that transactions entered into by CADES are subject to ex post external monitoring by an independent auditing and control body, which will submit quarterly reports on CADES's activities to the Board of Directors. These measures reinforce the procedures already established by CADES since its formation.

The changeover to the euro and the year 2000 bug

CADES has effectively undertaken the task of adapting its IT resources to the introduction of the euro and to prevention of the possible impact of the year 2000 bug. Its IT systems will be fully operational in time to handle these two major events.

The quotation of CADES's issues   

Investors have at their disposal a variety of media for obtaining the latest information on CADES's various issues. On the internet, CADES's web-site permanently displays the latest data pertaining to its main domestic issues quoted in Paris.
An identical service will be set up shortly for its foreign currency bonds.
All the major banks quote CADES's securities on their electronic servers (Reuters, Telerate, Bloomberg, Fininfo, etc.).