Morningstar DBRS Confirms AAA Credit Ratings on CAFFIL Public Sector Obligations Foncières (SCF - Public Sector - Bullet)

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

Concurrently, Morningstar DBRS discontinued its credit ratings on S 898-0 (RCB 146), which matured on 30 August 2024.

As of the date of this press release, the series of covered bonds (CBs) outstanding under the Programme, in different currencies, total an equivalent amount of EUR 51.3 billion.

The credit 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. 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 12.5% to which Morningstar DBRS gives credit, which is the minimum level observed in the past 12 months, adjusted by a scaling factor of 0.85.
-- The sovereign credit rating on the Republic of France, rated AA (high) with a Stable trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS 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, Morningstar DBRS 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 of 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 of 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 credit 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 Morningstar DBRS 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 2024, the CP was composed of public-sector assets equivalent to EUR 61.3 billion and substitute assets equivalent to EUR 3.0 billion. About 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 Morningstar DBRS' 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 Morningstar DBRS' "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 51.3 billion in OF currently outstanding, as at 30 June 2024, CAFFIL had other privileged liabilities that totalled EUR 91 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 2024 was EUR 64.3 billion, yielding a current nominal OC ratio of 25.1%.

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 Morningstar DBRS' criteria. Morningstar DBRS 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 Morningstar DBRS' criteria and have been given full credit in Morningstar DBRS' analysis. The residual foreign currency assumed open position has been stressed.

CAFFIL enjoys a substantial liquidity position. In Morningstar DBRS' view, this mitigates the liquidity constraint imposed by the termination payments that might be due under the swaps. Moreover, Morningstar DBRS 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, as of 30 June 2024, is 6.7 years while that of the CBs is 6.2 years. This generates an asset-liability mismatch that is mitigated by the available OC.

Morningstar DBRS assessed the LSF related to the programme as "Very Strong" according to its rating methodology. For more information, please refer to Morningstar DBRS' 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 dbrs.morningstar.com.

Morningstar DBRS' credit rating 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 are the related Interest Payment Amounts and the related Principal Balance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on Sfil are likely to have an impact on these credit ratings.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings" at https://dbrs.morningstar.com/research/437781.

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" (2 April 2024), https://dbrs.morningstar.com/research/430636.

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

Morningstar DBRS 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 Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include loan-by-loan data on the CP as at 31 March 2024 and investor reports until 30 June 2024, 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.

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

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

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

Morningstar DBRS 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 28 August 2024, when Morningstar DBRS assigned a AAA credit rating to the RCB Series 2024-10 notes.

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

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Antonio Laudani, 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://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024), https://dbrs.morningstar.com/research/430636

-- Modelling Assumptions for Portfolios of Public Sector Exposures (9 July 2024) and Public Sector Model version 0.2.1, https://dbrs.morningstar.com/research/435921

-- Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881

-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165

-- Derivative Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435260

-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278

-- Operational Risk Assessment for European Structured Finance Originators (6 August 2024), https://dbrs.morningstar.com/research/437541

-- Operational Risk Assessment for European Structured Finance Servicers (6 August 2024), https://dbrs.morningstar.com/research/437543

-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544

-- Global Methodology for Rating Sovereign Governments (15 July 2024),
https://dbrs.morningstar.com/research/436000

-- Currency Stresses for Global Structured Finance Transactions (30 January 2024), https://dbrs.morningstar.com/research/427281

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024),
https://dbrs.morningstar.com/research/437781

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

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