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VEOLIA PPP FINANCE:
A « société de crédit foncier »
in Veolia Environnement
Denis DAUMAL
Markets and Analysis Director
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Veolia Environnement’s current risk profile

Veolia Environnement is a global leader in environment services in
the concessionary companies sector.

Veolia Environnement is involved in

water distribution,

waste treatment sector,

Energy services,

Public transportation.
 Concessionary contracts with state, regional and local authorities
account for two thirds of VE’s turnover. Exposure to emerging
markets is limited, with less than 10% of sales originating from
countries with a credit rating lower than A3.
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The conversion to IFRS standards

The implementation of the new international accounting standards (IFRS) led to a
reconsideration of a number of tangible assets within the Veolia Environnement (VE)
group that have been used under concession agreements.

Where VE has to construct infrastructure and subsequently manage it, at the end of
the agreement the infrastructure becomes the asset of the contractor. As a
consequence, these infrastructures are registered as financial assets instead of a
tangible assets

VE therefore operates as a financial intermediary and this business activity is
undertaken across the group.

It is predominant in areas that generate stable, recurring cash-flows.

This accounting position, which is a true reflection of the business situation, led the
group to reconsider the presentation of its assets and liabilities statement: it
substituted a line of financial receivables owed by public authorities or large
companies, for €2 billion in tangible assets. This situation has also enabled the group
to communicate to shareholders and investors a more realistic overview of the risk
profile and balance sheet position, principally by reducing the group’s financial debt.
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Issues relating to financing VE’s financial receivables
 The group undertook a study on financing these receivables

3 options were studied:

Securitisation of some part of the activities and their dedicated assets

« anglo-saxon » Covered Bond issue


Creation of a « société de crédit foncier », wich will issue « obligations
foncières »
Quickly the Société de Crédit Foncier , « SCF », appeared as the
good way to follow.
The VE Finance Project: a credit institution (« Société
de Crédit Foncier », SCF)

A SCF is a regulated credit institution, which can only hold
receivables from public sector entities (or mortgages that are not
included in this project) and which may issue « obligations
foncières » for these receivables.

« Obligations foncières » benefit from special, prudent treatment
(10% weighting for the ESR) and belong to the very large class of
European securitized assets, totalling €1,700bn.

SCF’s operate under the dual supervision of the French banking
regulatory body (Commission Bancaire, CB) and a "specific
supervisor", approved by the CB and primarily responsible for
certifying the eligibility of receivables and adherence to specific SCF
regulations.

Furthermore, the SCF must be managed (via an agreement) by a
first tier credit institution, which must ensure banking regulations are
adhered to and ALM management (currency risk, interest rate risk,
early redemption risk, etc.) is of the requisite quality.
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The SCF: a secure, competitive financing vehicle

The reform of SCFs in 1999 aimed to establish Paris as a more attractive
location and to create a new refinancing tool for long-term credit as an
alternative to FCCs, the French securitisation vehicle, which does not rely
on the credit quality of its shareholders.

The SCF is an extremely safe vehicle, offering:

a targeted purpose,

asset quality governed by law,

a strengthened, prudent scheme (specific monitoring and over collateralization),

covered bond privileges,

a special scheme for public authority procedures at all stages (agreement
extensions, non-extensions of shareholder bankruptcies, with the exception of
optional nullification during the suspect period, etc.).
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Where are we on the project

On 28 November 2006, Veolia PPP Finance was granted a license
by the Banque de France’s Credit Institution and Investment Firms
Committee (Comité des Etablissements de Crédit et des Entreprises
d’Investissements - CECEI) to operate as a société de crédit foncier
(SCF).

The management agreement between Veolia PPP Finance and
Société Générale is finalised, and also approved by the CECEI.

We are now working on the presentation of the project to the rating
agencies, which is a specific job because of the strong innovative
aspect of the project.

Veolia PPP Finance is actually the first SCF out of the financial
system, as long as its main shareholder is a corporate

The subject is for us to demonstrate that the flows capted by the SCF
is absolutely immune from an operational risk.
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Veolia PPP Finance: conclusion

To summarize, VEOLIA PPP FINANCE is:
-
A French Credit Institution, which benefits of the strength of the French
Banking System
-
A Société de Crédit Foncier, agreed, supervised by a specific
controller, and protected by a super privilege
-
Finally, A subsidiary of Veolia, a French Group listed on the New-York
Stock Exchange, and by that forced to be Sarbannes Oxley compliant.
For all these reasons, Veolia PPP Finance will offer to its bonds holders,
a very high level of security, totally delinked from Veolia’s risk profile
Veolia Environnement at a glance: 2006 key
figures (in €m and at current exchange rates)
(1)
30 000
25 000
4500
28,620
25,570
Excludes discontinued operations.
4,282
3,863
4000
22,792
Repayment of operating
financial assets
Cash flow from
operations
3,467(1)
20 000
3500
15 000
10 000
+10.8%
+8.9%
3000
5 000
2500
0
2004
2004
2005
2006
2006
Cash flow generation = Cash flow from operations
+11.9%
Consolidated revenue
2005
+ Repayment of operating financial assets
2,222
2 000
1,629
1,904
762
800
630
700
600
500
1 000
477
400
300
200
100
0
0
2004
2005
Recurring operating income
2006
+16.7%
2004
2005
Recurring net income
2006
+21%
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