(The following statement was released by the rating agency)
July 25 - Fitch Ratings has affirmed Compagnie de Financement Foncier’s (CoFF)Obligations Foncieres (OF) at ‘AAA’.
The affirmation takes into account a slight improvement in the Discontinuity Factor (D-Factor) to 14.1% from 14.5%, based on a positive review of the originator’s systems and processes, as evidenced by the quality of data provided on the cover pool. It also incorporates a revision of the overcollateralisation (OC) supporting the ‘AAA’ rating to 16.0%, which reflects higher expected credit losses on the assets.
Notably, the credit quality of the RMBS and public sector bonds has worsened as a consequence of the downwards rating migration in these sub-portfolios, particularly for exposures to Spain and Italy. The increase in the OC supporting the rating also reflects a deterioration in the credit quality of the residential assets securing the collateralised loan to BPCE via a reduction in the proportion of first-lien mortgages. Finally, the expected loss calculated on the public sector loans, consisting of exposures to French local authorities, has also increased as a consequence of the Negative Outlook Fitch has assigned to the French sovereign IDR.
The ‘AAA’ rating is based on CFF’s Long-term IDR of ‘A+', as first lender of recourse, and an updated D-Factor of 14.1%, the combination of which enables the OF to be rated as high as ‘AA+’ on a probability of default (PD) basis. The rating also reflects the quality of the collateral and the 16.0% nominal OC that the issuer intends to maintain between the cover assets and the OF, which provides for outstanding expected recoveries on defaulted OF in a ‘AAA’ stress scenario, and thus allows for one notch recovery uplift to ‘AAA’ under Fitch’s methodology.
CoFF has used the provisions of the OF law to include residential loans and public-sector exposures on its balance sheet. As at 31 March 2012, the cover pool comprised residential loans (26.5%), mortgage promissory notes from CFF (9.4%), RMBS (9.2%), public-sector loans (21.1%), public-sector bonds and securitisation of public-sector assets (20.0%) and replacement assets (13.8%).
Fitch has analysed the credit risk on the different sub-portfolios. In particular, Fitch assumed a default of CFF on the promissory notes, and thus modelled the underlying residential collateral securing the notes. Approximately 24% of the RMBS, 80% of the public sector securitisations, and 13% of the public-sector bonds are rated ‘AAA’, assuming the Fitch rating or the lowest of the available public ratings. Most remaining securities have a public rating, and the average rating of the securities’ portfolio is ‘A’.
The replacement assets consist mainly of a EUR14bn secured loan to BPCE, with a rolling maturity of 100 days. The loan is partially collateralised by EUR12.4bn of residential and commercial loans, the remainder being unsecured. This exposure to BPCE was assumed to default in a ‘AAA’ scenario, as it is viewed as an excessive exposure towards a single entity, as per Fitch’s counterparty criteria. Fitch modelled average recoveries on the unsecured exposure, and, in the case of the secured exposure, recoveries from the pool of assets securing them.
CoFF’s asset and liability rules aim at limiting the duration gap between the assets and liabilities within two years. However, under Fitch’s calculations, the mismatches are higher as the agency applies a look-through approach for the intra-group secured exposures, modelling the assets underlying the mortgage promissory notes and the secured loan. As of 31 March 2012, the WA life of the assets was 11.2 years, versus 7.5 years for the OF. The majority of the assets directly on balance sheet and the OF are swapped into floating rate. However, some interest rate mismatches would arise following a default of CFF on its promissory notes and of BPCE on the secured loan, as the majority of assets securing them are fixed rate.
As of 31 March 2012, the nominal level of OC between the cover pool and the OF was 16.7%, whereas the lowest OC of the last 12 months was 12.8%. Fitch calculated a level of OC supporting an ‘AA+’ rating on a PD basis, and an ‘AAA’ rating factoring in recoveries given default, at 16.0%. Fitch gives credit to the issuer’s intention to maintain a nominal OC level greater than or equal to 16.0%. The level of OC supporting the rating will be affected, among other factors, 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 that the current level of OC supporting the rating will remain stable. Fitch will monitor the key characteristics of the cover assets and outstanding covered bonds on an ongoing basis and check whether the OC taken into account in its analysis provides protection commensurate with the rating.
CoFF is a societe de credit foncier (SCF), a special-purpose credit institution licensed by the French banking authorities to issue OF, the French form of legislative covered bonds. It is wholly-owned by Credit Foncier de France (CFF, ‘A+'/Negative/‘F1+'), which is a 100% subsidiary of Banques Populaires Caisses d‘Epargne (‘A+'/ Negative/‘F1+').
All else being equal, the covered bonds can remain rated ‘AAA’ as long as CFF’s Long-term IDR is at least ‘BBB’. However, on 30 May 2012 Fitch published a report entitled “Exposure Draft: Global Covered Bonds Rating Criteria”. The report proposes enhancements to the covered bonds rating criteria in order to increase transparency and reflect Fitch’s updated views of systemic risk and cover pool liquidity. Fitch anticipates there will be no negative impact on CoFF’s covered bond ratings if the exposure draft proposals were implemented as proposed.