DBRS Assigns AAA Rating to CAFFIL Public Sector Obligations Foncières

DBRS Ratings Limited (DBRS) assigned a rating of AAA to the Obligations Foncières (OF) outstanding under the CAFFIL SCF (CAFFIL or the Issuer) Public Sector Covered Bonds Programme (the Programme). As at 23 August 2018, there were 526 series of covered bonds (CB) outstanding under the Programme, in different currencies, totalling an equivalent amount of EUR 50.1 billion.

The total programme amount is equivalent to EUR 75.0 billion. In addition to the OF outstanding, CAFFIL has other privileged liabilities that totalled EUR 500 million as at 30 June 2018 that are due under the swaps in case of termination. The amounts are due pari passu with the bonds. The total CP balance as at 30 June 2018 was EUR 58.0 billion, yielding a nominal overcollateralisation (OC) ratio of 14.5%.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (high), which is the Long-Term Issuer Rating of SFIL SA (SFIL). SFIL is the Reference Entity (RE) for the Programme, while CAFFIL is the Issuer.
-- While the Legal and Structuring Framework (LSF) Assessment does not currently affect the rating in a material way, an LSF Assessment of “Very Strong” is associated with the Programme.
-- While the Cover Pool Credit Assessment (CPCA) level does not currently affect the rating in a material way, a CPCA of A (low) was assigned to the Programme.
-- An LSF-Implied Likelihood (LSF-L) of AAA.
-- While the level of recoveries does not currently affect the rating in a material way, a two-notch uplift for high recovery prospects is possible.
-- The level of OC of 10.1% to which DBRS gives credit.

The transaction was analysed using the DBRS European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by five notches to A(low) would lead to a downgrade of the LSF-L by three notches to AA (low), resulting in a downgrade of the CB rating by one notch. Everything else equal, the CB ratings would be downgraded if (1) DBRS’s ratings of the Republic of France were downgraded below AA (low); (2) the composition of the CP, the level of OC to which DBRS gives credit, interest rate stresses, or foreign currency exposure, changed adversely to a degree that a one-notch uplift for good recovery prospects could no longer be granted.

The CP is composed of public sector assets (equivalent to EUR 56.1 billion as at 30 June 2018) and substitute assets (equivalent to EUR 1.84 billion). Roughly 86% of the CP by loan balance is concentrated in France (the Domicile Sovereign), where the RE and the Issuer are also located in France (the Host Sovereign). In DBRS’s view, this exposes CB investors to an increased risk that the creditworthiness of the RE and the CP may deteriorate at the same time. According to DBRS’s “Rating European Covered Bonds” methodology, in this circumstance, the rating of the CB is typically capped at three notches above the rating of the sovereign.

CAFFIL’s CBAP is set at AA (high), equal to SFIL’s Long-Term Issuer Rating.

CAFFIL’s CBAP does not incorporate any uplift from the Issuer rating. This is in accordance with DBRS’s Rating European Covered Bonds methodology, whereby in the above-mentioned circumstances up to a one-notch uplift from the Issuer Rating would be possible. DBRS notes that due to its ownership and the expectation of support, SFIL’s ratings are positioned above the entity’s intrinsic creditworthiness. Although SFIL is subject to the European Union’s Bank Recovery and Resolution Directive, DBRS believes it more likely that an intervention from its main shareholder, the French State, would take place before any resolution measures.

DBRS has associated an LSF Assessment of “Very Strong” to the CAFFIL OF Programme. The “Very Strong” LSF Assessment reflects DBRS’s view of the following:

--The French CB legal framework giving CB holders first priority right on the CP, in combination with a residual commingling risk that DBRS considers limited.
--The legally sanctioned six-month liquidity coverage rule, which ensures that, at any time, the CP contains sufficient assets that are either liquid or can be mobilised via the central bank repo operations so as to ensure a balance between projected incoming and outgoing cash flows, including principal, interest, senior costs and cash flows from hedging contracts. This is complemented by DBRS’s expectation of the regulator’s willingness and ability to support the CB instrument in line with the Host Sovereign’s AAA rating.
--The public sector nature of the CP exposures, the ability to freely pledge all exposures at any time without formalities, the sizeable proportion of CP assets that are eligible for repo operations with the central bank, and the ability of the SCF to issue up to 10% of retained CBs at any time, as long as the legal minimum OC level of 5% is not breached, to pledge for the benefit of the central bank for repo operations.
--The role of the specific controller (contrôleur spécifique) in independently monitoring the ongoing compliance of the French SCF with the provisions of the French CB legal framework, the compliance of the CP with the eligibility criteria as well as coverage ratio and the review of the risk linked to the mismatches in interest rates and maturities of assets and liabilities.
--The role of the Autorité de Contrôle Prudentiel et de Résolution in the supervision of French CBs, the high penetration of the OF as a funding tool for French banks and a history of regulatory intervention in the restructuring of CB issuers, which, in DBRS’s view, benefit OF holders.

Everything else equal, the LSF assessment of “Very Strong”, which currently has no material impact on the rating, could be downgraded if (1) the Republic of France were downgraded below AA; (2) the liquidity position of the Issuer were to, in DBRS’s view, be substantially and permanently impaired.

With reference to the Export Credit Agency loans refinanced by CAFFIL via SFIL, CAFFIL benefits from an Enhanced Guarantee provided by the Republic of France, acting through Bpifrance Assurance Export. Under the terms of the Enhanced Guarantee, should SFIL not be able to repay CAFFIL’s advances because of the non-performance of the underlying foreign debtors, then the French state will bear any claim made by CAFFIL. However, under this circumstance, the original maturity date of the advance would be automatically extended by five months.

CAFFIL uses multiple commercial banks for the collection of sums due under the loans. No rating downgrade language is in place to manage or terminate these relations (other than with SFIL). However, internal guidelines set limits to the maximum exposure of CAFFIL to each bank at any given time. Exposure limits are validated by CAFFIL’s Credit Risk Committee. The maximum exposure limit is currently EUR 3.0 million. Any excess is swept daily to the accounts that CAFFIL holds with Banque de France (BdF, not rated by DBRS) and the French Treasury (Republic of France, rated AAA with a Stable trend by DBRS). In its analysis, DBRS gives limited credit (40%) to the amounts standing to the credit of the commercial banks collection accounts. In DBRS’s view, this and the daily sweep sufficiently mitigate commingling risk. Full credit is instead given to amounts standing to the credit of the account CAFFIL holds with BdF and the French Treasury and such accounts are treated in DBRS’s analysis as two of the CP assets.

In its capacity as servicer and cash manager, SFIL manages CAFFIL’s cash surplus by investing in securities or CBs with a minimum equivalent rating of AA (low) or A (low) when the maturity of the investment is less than 100 days as per legislative criteria. Neither CAFFIL’s OF nor SFIL bonds are purchased. DBRS gives full credit to these substitute assets in its analysis. Pursuant to an Intra-Group Loan Agreement, CAFFIL lends part of its excess cash to SFIL for maturities shorter than one year. These loans are subject to downgrade language in line with DBRS’s criteria and have been given full credit in DBRS’s analysis.

CAFFIL has several hedging agreements in place with multiple commercial banks. CAFFIL is not required to post collateral under any of these agreements. All the hedging agreements entered into with counterparties other than SFIL either contain no downgrade language or downgrade language that is not in line with DBRS’s criteria. DBRS gave limited credit (20%) to these swaps in its analysis. The hedging agreements entered into with SFIL contain downgrade and collateral posting language in line with DBRS’s criteria and have been given full credit in DBRS’s analysis. The residual foreign currency assumed open position has been stressed.

CAFFIL enjoys a substantial liquidity position. In DBRS’s view, this mitigates the liquidity constraint imposed by the termination payments that might be due under the swaps. Moreover, DBRS has assumed a 12-month asset-liability matching rule in its analysis in lieu of the minimum six-month period required by the OF legislative framework. This is the main driver of the halving of the Pass-OC level associated with the CPCA of A (low). Although currently not a driver of the OF rating, a substantial and permanent impairment of the Issuer’s liquidity position would affect the Pass-OC level.

Approximately 9% of the CP by loan balance is concentrated in Italy (rated BBB (high) with a Stable trend by DBRS). In DBRS’s analysis, although a sovereign exposure is defaulted immediately above the rating of that sovereign, the entire exposure to a jurisdiction is defaulted at a stress level of three notches or more above the rating of that jurisdiction, with only 20% recoveries. Although currently not a driver of the OF rating, the Italian sovereign rating as well as the CP concentration is a driver of the A (low) CPCA and the Pass-OC level.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Covered Bonds”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/ research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include loan-by-loan data on the CP containing, among others, information on currency of the loan, initial amount, residual amount, maturity date, amortisation type, underlying debtor, country of the debtor, guarantor, country of the guarantor and the interest rate type provided by the Issuer.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Vito Natale, Senior Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 10 September 2018

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

--Rating European Covered Bonds
--Modelling Assumptions for Portfolios of Public Sector Exposures
--Global Methodology for Rating Banks and Banking Organisations
--Legal Criteria for European Structured Finance Transactions
--Derivative Criteria for European Structured Finance Transactions
--Interest Rate Stresses for European Structured Finance Transactions
--Operational Risk Assessment for European Structured Finance Originators
--Operational Risk Assessment for European Structured Finance Servicers
--Rating Sovereign Governments

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.