September 13, 2012 / 4:10 PM / 5 years ago

TEXT-Fitch rates Zephyr Home Loans FCT

(The following statement was released by the rating agency)

Sept 13 - Fitch Ratings has assigned Zephyr Home Loans FCT's (Zephyr HL FCT) EUR500m class A1 and EUR500m class A2 floating rate notes a final 'AAA' rating with a Stable Outlook. The notes have a scheduled maturity of 2019 and 2022 and a legal final maturity of 2053 and 2056, respectively. The rating is based on Banque Federative du Credit Mutuel's (BFCM; 'A+'/Stable/'F1+') Long-term Issuer Default Rating, which is acting as the main debtor of recourse, a Discontinuity-Cap (D-Cap) of 8 (minimal discontinuity) and a level of asset percentage (AP) that Fitch gives credit to of 72.0%. In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be vulnerable to downgrade, all else being equal, if one of the following occurred: the IDR was downgraded to 'BB' or the publicly committed AP level increased above 72.0%, which is the maximum AP in line with the 'AAA' covered bond rating. The 72.0% AP provides no cushion relative to the maximum AP in line with Fitch's 'AAA' rating. The 72.0% AP limits the rating on a probability-of-default (PD) basis to 'AA+' and supports a one notch recovery uplift. The combination of the D-Cap of 8 and BFCM's IDR does not limit the rating on a PD basis. Fitch takes into account the publicly stated AP of 72.0% in its analysis as the agency considers the programme to be dormant under its updated covered bond rating criteria since it is only expected to be used for central bank repo purposes. Under the updated Covered Bond Rating Criteria, Fitch considers dormant programmes to be more at risk than active programmes; notably when looking at overcollateralization (OC) and asset pool quality maintenance. Zephyr HL FCT is a French securitisation vehicle established by BFCM as custodian and a management company (France Titrisation). The FCT is purchasing advances made by Caisse Federale de Credit Mutuel (CFCM) to BFCM, the payments of which exactly match those of the notes. The advances are secured under the provisions of articles L.211-36 II, and L.211-38 to L.211-40 of the French Monetary Code by a collateral pool of EUR1.45bn residential loans from the collateral providers - entities of the Credit Mutuel Maine-Anjou, Basse-Normandie and Credit Mutuel Ocean (CMO) groups. Around 47% of the cover assets do not benefit from any guarantee (30.2%), or only benefit from a mortgage promise (17.0%). Fitch has assumed no recoveries would be obtained from such loans. The remaining portion is either secured by other pledges or guarantees (30.9%) or second-lien mortgages (7.9%). Fitch has assumed low recoveries from such loans. In a 'AAA' scenario, Fitch has calculated a cumulative weighted average frequency of foreclosure for the cover assets of 23.0% and a weighted average recovery rate of 15.4%, implying an expected loss of 19.4%. Limited historical performance data was available for loans originated by CMO before 2009. Fitch reflected this limited data in its 'AAA' credit loss assumptions. Around 95% of the loans bear a fixed interest rate, whereas all notes pay a floating rate. This is offset by swaps with BFCM to hedge interest rate mismatches between the residential loans and the notes. Fitch took into account an asset swap margin of 1.0% compared with a weighted average margin of 1.35% on the notes. The D-Cap of 8 for this programme reflects the minimal risk of discontinuity of payments under the notes assuming an insolvency of BFCM due to the programme being pass-through after a sponsor's default and sufficient liquidity protection being in place. Fitch has assigned the following risk assessments of the D-Cap components to the programme: Asset segregation: Moderate This takes into account the satisfactory segregation of the collateral pool from the bankruptcy estate of the collateral providers, despite residual risks of asset claw back and set-off from the underlying borrowers. Liquidity and systemic risk: Very low This considers the notes reverting to a pass-through pro rata structure following a default of BFCM, which fully mitigates the risk of liquidity gaps and sufficient liquidity protection being in place through a reserve being funded at the loss of 'A' or 'F1' covering the next three months of interest payments due on the notes. Cover pool-specific alternative management: Moderate Fitch considers this assessment as up to two categories worse for dormant programmes than what the assessment would be if the programme were an active issuer to the market. This is to reflect a greater link to the IDR of the sponsor for such programmes. Fitch considers the risk of an issuer devoting less resource and providing less support to a programme to be greater than for one that actively issues to the market. Systemic alternative management: Very Low This risk assessment incorporates the expected ease of transition to an alternative manager since there is no need to liquidate the cover assets under a pass-through structure. Privileged Derivatives: Moderate This takes into account the vulnerability of having a material internal derivative counterparty in the programme. D-Caps determine the maximum rating notch uplift from the IDR to the covered bond ratings on a PD basis reflecting Fitch's view of the likelihood of a programme defaulting immediately following BFCM's default. The assessments of the components are published for programmes with a D-Cap of 8 but the highest risk assessment does not drive the result unless Fitch expects that a weakness in any of the components would compromise the overall minimal discontinuity assessment for the programme, which is not the case for this programme. The maximum AP in line with the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time. For all of Fitch's Eurozone Crisis commentary go to here (Caryn Trokie, New York Ratings Unit)

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