DBRS Ratings Limited (DBRS) assigned a rating of AAA to Series 2019-10 issued under the CAFFIL SCF (CAFFIL or the Issuer) Public Sector Covered Bonds Programme (the Programme). Series 2019-10 is a EUR 10 million fixed-rate bond paying a coupon of 1.7175% and maturing on 4 March 2049. At the same time, DBRS discontinued its rating on FR0010051698, which matured on 20 February 2019.
Including the newly issued series, there are 531 series of covered bonds (CB) outstanding under the Programme, in different currencies, totalling an equivalent amount of EUR 51.2 billion.
The 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 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 ratings 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 overcollateralisation (OC) of 9.8% 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 downgraded its rating of the Republic of France below AA (low); or (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.
As of December 2018, the CP was composed of public sector assets (equivalent to EUR 54.1 billion) and substitute assets (equivalent to EUR 2.8 billion). Roughly 87% 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’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.
In addition to the EUR 50.3 billion OF currently outstanding, as at 31 December 2018, CAFFIL had other privileged liabilities that totalled EUR 515 million, which are due under the swaps in case of termination. The amounts are due pari passu with the bonds. The public sector assets’ balance as at 31 December 2018 was EUR 54.1 billion and the substitute assets amounted to EUR 2.8 billion. All else unchanged, the EUR 2.86 billion proceeds of CB issued since the end of December 2018, result in a 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’s criteria. DBRS gave limited credit of 30% 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.
The DBRS-calculated weighted-average life of the assets is roughly eight years while that of the CB is 7.2 years. This generates an asset-liability mismatch that is mitigated by the available OC.
For further information on the Programme, please refer to the rating report at www.dbrs.com.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating European Covered Bonds”.
In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis.
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:https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for these ratings include investor reports provided by the Issuer.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial ratings, 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 these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 20 February 2019, when DBRS assigned a rating of AAA to Series 2019-8 and 2019-9 and confirmed its AAA ratings of the other outstanding OF rated by DBRS.
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: Roger Bickert, Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 10 September 2018
DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company 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 email@example.com.