LONDON/PARIS French state bank Caisse des Depots et Consignations risks stretching its balance sheet and depriving its core local client base if it continues a recent spending spree acting as a knight in shining armor for distressed big businesses.
CDC has been hyperactive in an otherwise moribund dealmaking scene, helping craft and contributing heavily to the bailout of Franco Belgian lender Dexia.
It is close to a deal to inject funds into troubled insurer Groupama and there is also speculation the 195-year-old lender, which has boosted its role in interbank lending as well, may get involved in water utility Veolia's debt-reduction efforts.
The state bank's step up in activity comes as President Nicolas Sarkozy tries to avoid any corporate crises and keep France's triple-A rating ahead of next April's election.
Created in 1816 to finance reconstruction after the Napoleonic wars, CDC is backed by the French government and so theoretically has a bottomless cash trove. But with France's sovereign triple-A debt rating in jeopardy, CDC's resources could be stretched in an era of austerity.
"I do see a risk because even though the Caisse des Depots has a lot of resources, there's only so much additional debt they can take on," said a Paris-based mergers and acquisitions lawyer, speaking on condition of anonymity.
CDC is entitled to raise up to 63 billion euros ($83 billion) in debt, including mainly short term debt securities, Fitch analyst Christophe Parisot said. But its borrowing costs would increase if France were downgraded, he added.
CDC rode to Dexia's rescue in October by agreeing to take over 65 percent of the bank's French municipal lending business to guarantee, alongside Banque Postale, a debt portfolio totaling about 70 billion euros. In a worst-case scenario, CDC could theoretically take a total 45.5 billion euros write-down on the deal, Parisot said.
A CDC spokesman declined to comment, but pointed to a recent interview of Chief Executive Augustin de Romanet in Le Monde in which he said the bank's state backing eliminated any risk.
Prospects to recover the Dexia guarantees are quite good as local authorities, the issuers of these loans, are globally solvent and benefit from state backing. But any hit to CDC would come on top of its losses as Dexia's top shareholder after the lender's stock plummeted by 87 percent year-to-date.
Even after the Dexia rescue, CDC has jumped to the aid of Groupama through its Icade unit by launching a bid for real estate company SILIC -- controlled by Groupama, which is trying to surmount a key end-of year solvency test.
The rescue may also see CDC invest 300 million euros in preference shares in Groupama's GAN Eurocourtage insurance broker, sources have said.
Several bankers familiar with the situation saw the moves as a state-brokered deal aimed at preserving the interests of French farmers, Groupama's main policy holders and shareholders, as Groupama doesn't present any systemic risk.
"This clearly falls outside CDC's mission", one of the bankers said. "I would be surprised if at least a deputy didn't raise the question in Parliament."
CDC's defenders argue the giant state bank has legitimate interests both in real estate, given its existing Icade stake, as well as insurance via its CNP Assurances life insurance unit.
CDC's activist stance isn't just drawing fire from dealmakers, but also from the bank's own workers.
"There is a growing commitment of Caisse des Depots money towards investments that are not within its remit," said Jean-Philippe Gasparotto, CGT union representative and 20-year employee at the state bank. "We're reaching breaking point."
The bank has also used 12 to 15 billion euros of its funds to provide liquidity to strained interbank lending markets, Romanet said in a recent radio interview.
The left-leaning CGT union accuses Romanet of taking marching orders from centre-right Sarkozy, who is facing an uphill re-election battle.
SMALL BUSINESS ROLE
The union is also fuming over CDC's ties to Veolia, the world's largest water utility, which is looking to sell assets as it struggles to avoid a debt rating downgrade.
Veolia wants to sell its 50 percent of Veolia-Transdev, a French transport joint venture with CDC, and has made clear that CDC itself is a potential buyer for the stake.
Some observers worry that the CDC's outsized role on the corporate scene could force the bank to scale back core functions such as lending to small and medium sized business on a local level and financing housing and school construction.
Mounting concerns over public hospitals' solvency could also require CDC's aid in the near future, Fitch's Parisot warned.
On the plus side, CDC has several liquid assets, such as a stake engineering firm Egis, it could offload to beef up its financial firepower, Parisot said.
Advocates say CDC is uniquely placed to ride to troubled companies' rescue and that it is normal to see it more active in difficult times.
"It has to be said that CDC is pretty well-placed to be a good investor of distressed assets -- who else would be there to do due diligence on Groupama?," said David Thesmar, professor of finance at HEC.
But a financially stretched CDC could be especially bad news for French regional businesses at a moment when the country's top banks are selling assets and scaling risk in response to tighter capital rules, the M&A lawyer said.
"To the extent there's a credit crunch and banks are less available to provide financing and the CDC is less available, I think lots of small and medium-sized businesses will suffer as well," he said.
(Additional reporting by Lionel Laurent, Editing by Mark Potter)