Land at the service of the recapitalization of French companies

Land at the service of the recapitalization of French companies

OPINION | By a simple accounting entry, companies ‘equity could increase by 425 billion euros by 2022. A temporary change in the tax treatment of the accounting revaluation of companies’ assets could indeed encourage them to enter capital gains on their balance sheets. which result in particular from the upward trend in land prices. The resulting accounting recapitalizations could facilitate companies’ access to financing and support their investment capacity.

The crisis and the losses that it generates for many companies are damaging the level of their equity, that is to say the residual value of the company going to shareholders when all creditors have been repaid. Restoring strong equity cushions is a key determinant of companies’ ability to invest in the years to come. The participatory loan scheme recently announced by the Minister of the Economy pursues this objective by offering a quasi-equity financing tool benefiting from a partial public guarantee with a financing capacity of 20 billion euros.

A provision of the finance law for the year 2021, less commented on, could also significantly increase the level of accounting equity of companies. The tax neutralization of the free revaluation of assets until December 2022 will allow companies that wish to revalue their assets to their market value without the revaluation surplus being immediately reintegrated into taxable income. In normal times, this integration is disincentive since it involves a short-term corporate tax surcharge. The increase in asset value, resulting from the revaluation, generates an increase in equity on the liabilities side through the increase in net income.

This provision is by no means anecdotal. Company assets are most often valued at their historical value less accumulated depreciation when they are depreciable. However, the dynamics of real estate prices since the beginning of the 2000s have implied a growing divergence between the market value and the book value of assets held by companies.

If we limit ourselves to land assets, INSEE’s balance sheet, reflecting market prices, indicate that companies held € 1,358 billion of land supporting buildings in 2019. In a study published with Denis Fougère and Remy Lecat, we showed that the average age of real estate assets of companies is around 14 years. According to the INSEE benchmark, property prices increased in France by 45% between 2005 and 2019. The difference between the market value and the book value of corporate assets would therefore rise. to nearly 425 billion euros for land alone.

Their revaluation could increase the accounting equity of French companies by the same amount due to its impact on net accounting income. This inflation in accounting equity is likely to significantly improve the leverage ratios that relate financial debt to equity – as a reminder, the net debt of French companies today stands at 1,002 billion euros.

Can this massive recapitalization, the result of a performative accounting entry, contribute to the rebound of companies?

The objective of this provision of the finance law is to improve the financing capacity of companies by allowing them to display a more flattering balance sheet, but faithful to their current situation.

The results of the previously cited study, which establishes a causal link between the market value of companies’ real estate and their debt capacity, suggest that funders are able to see beyond the book value of the company. ‘active. However, this does not imply that the accounting revaluation of the asset and its corollary recapitalization will have no effect on the financing. Improving the debt-to-equity ratio can improve the credit rating (the external assessment of the probability of default of a counterparty, in particular that issued by the Banque de France) which influences credit granting decisions and on the cost of credit.

Several uncertainties remain, however, as to the macroeconomic benefits to be expected from this provision.

In the short term, the potential for asset revaluation, which is heterogeneous between companies, is not necessarily correlated with possible financing difficulties following this crisis. Such a decorrelation would be observed in particular if the companies holding land had weathered the crisis better because of lower fixed charges. This correlation between the revaluation potential and the anticipation of financing difficulties will also determine the propensity of companies to take up the option since it is likely that they will revalue their assets only if they perceive a profit in terms of funding.

In the longer term, the fact of carrying out an exceptional revaluation of assets at a time when market valuations are historically high poses the risk, in the event of a reversal in valuations, of altering the reliability of the information reflected by the balance sheets, potentially to the detriment of the efficiency of the financing of the economy.

Simon Ray, economist at BSI Economics and teacher at Paris-Dauphine

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