Press Release

DBRS Morningstar Confirms AAA Credit Ratings on CAFFIL SCF Public Sector Covered Bonds (SCF - Public Sector - Bullet)

Covered Bonds

September 08, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA credit ratings on the Obligations Foncières (OF) outstanding under the CAFFIL SCF (the Issuer) Public Sector Covered Bonds programme (the programme). The credit rating actions follow the completion of a full review of the programme.

There are 471 series of covered bonds (CBs) outstanding under the programme, in different currencies, totalling an equivalent amount of EUR 52.0 billion.

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (high), which is the Long-Term Issuer Rating of Sfil. Sfil is the Reference Entity for the programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the programme, although the LSF Assessment does not currently affect the credit ratings in a material way.
-- A Cover Pool Credit Assessment (CPCA) of A (low) that can currently be achieved.
-- An LSF-Implied Likelihood (LSF-L) of AAA that can currently be achieved.
-- A possible two-notch uplift for high recovery prospects, although the level of recoveries does not currently affect the credit ratings in a material way.
-- The level of overcollateralisation (OC) of 10.9% to which DBRS Morningstar gives credit, which is the minimum level observed in the past 12 months, adjusted by a scaling factor of 0.85.
-- The sovereign rating on the Republic of France, rated AA (high) with a Stable trend by DBRS Morningstar, as of the date of this press release.

DBRS Morningstar analysed the transaction using its 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).

To assign credit ratings to new issuances, DBRS Morningstar uses the following stressed assumptions: a CPCA of BB, because BB is the lowest-tested stress level currently compatible with the AAA CB credit rating, and an LSF-L of AA (high) compatible with this level of CPCA.

Everything else equal, provided that a CPCA of A (low) is currently achievable, a five-notch downgrade of the CBAP would lead to a three-notch downgrade of the LSF-L to AA (low) and a one-notch downgrade on the CB credit ratings. Based on a CPCA of BB (i.e., the level tested to assign credit ratings to new issuances), a two-notch downgrade of the CBAP to AA (low) would lead to a two-notch downgrade of the LSF-L to AA (low), resulting in a one-notch downgrade on the CB credit ratings.

In addition, all else unchanged, the CB credit ratings would be downgraded if any of the following occurred:
(1) the sovereign rating on the Republic of France were downgraded below AA; (2) the relative amortisation profile of the CBs and CP were to move adversely; (3) volatility in the financial markets were to cause the currently estimated market value spreads to increase; or (4) the composition of the CP, the level of OC to which DBRS Morningstar gives credit, interest rate stresses, or foreign currency exposure were to change adversely to a degree that a one-notch uplift for good recovery prospects could no longer be granted.

As of 30 June 2023, the CP was composed of public-sector assets equivalent to EUR 58.4 billion and substitute assets equivalent to EUR 1.4 billion. Roughly 93% of the CP by loan balance is concentrated in France, the domicile sovereign. The RE and the Issuer are also located in France, the host sovereign. In DBRS Morningstar’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 Morningstar’s “Global Methodology for Rating and Monitoring Covered Bonds”, in this circumstance, the credit rating on the CB is typically capped at three notches higher than the credit rating on the sovereign.

In addition to the EUR 52.0 billion in OF currently outstanding, as at 30 June 2022, CAFFIL had other privileged liabilities that totalled EUR 93 million, which are due under the swaps in case of termination. The amounts are due pari passu with the CBs. The aggregated outstanding balance of the CP as at 30 June 2022 was EUR 59.7 billion, yielding a current nominal OC ratio of 15.4%.

CAFFIL has several hedging agreements in place with multiple commercial banks and 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 Morningstar’s criteria. DBRS Morningstar gave limited credit of 20% to these swaps in its analysis. The hedging agreements entered into with Sfil contain downgrade and collateral-posting language in line with DBRS Morningstar’s criteria and have been given full credit in DBRS Morningstar’s analysis. The residual foreign currency assumed open position has been stressed.

CAFFIL enjoys a substantial liquidity position. In DBRS Morningstar’s view, this mitigates the liquidity constraint imposed by the termination payments that might be due under the swaps. Moreover, DBRS Morningstar 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.

The reported weighted-average life of the assets is 7.0 years while that of the CBs is 6.7 years. This generates an asset-liability mismatch that is mitigated by the available OC.

DBRS Morningstar assessed the LSF related to the programme as “Very Strong” according to its rating methodology. For more information, please refer to DBRS Morningstar’s commentary, “French Covered Bonds: Legal and Structuring Framework Review” and press release, “DBRS Morningstar Assigns AAA Rating to CAFFIL Public Sector Obligations Foncières”, both available at www.dbrsmorningstar.com.

For further information on the programme, please refer to the rating report at www.dbrsmorningstar.com.

DBRS Morningstar’s credit ratings on the CB series outstanding under this programme address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated CB series are the related Interest Payment Amounts and the related Principal Balances.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on Sfil are likely to have an impact on this credit rating.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://www.dbrsmorningstar.com/research/416784.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: “Global Methodology for Rating and Monitoring Covered Bonds” (8 May 2023), https://www.dbrsmorningstar.com/research/413651.

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

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/401817.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The sources of data and information used for these credit ratings include investor reports and loan-by-loan data on the CP as at 30 June 2023 and 31 March 2023, respectively, containing information on the loan currency, initial amount, residual amount, maturity date, amortisation type, underlying debtor, country of the debtor, guarantor, country of the guarantor, and interest rate type, among others, provided by the Issuer.

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

At the time of the initial credit ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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

The last credit rating action on this transaction took place on 29 August 2023, when DBRS Morningstar assigned a AAA credit rating to the RCB 2023-6 notes and discontinued its credit rating on S 1207-0 that had matured.

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

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 10 September 2018

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

Download This Press Release