DBRS Ratings Limited (DBRS) confirmed its AAA ratings on the Obligations Foncières (OF) outstanding under the CAFFIL SCF (CAFFIL, Caisse Française de Financement Local or the Issuer) Public Sector Covered Bonds Programme (the Programme). The confirmations follow the completion of a full review of the Programme.
There are 520 series of covered bonds (CB) outstanding under the Programme, in different currencies, totalling an equivalent amount of EUR 50.6 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.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme, although the LSF Assessment does not currently affect the ratings in a material way.
-- A Cover Pool Credit Assessment (CPCA) of A (low) can currently be achieved.
-- An LSF-Implied Likelihood (LSF-L) of AAA can currently be achieved.
-- A two-notch uplift for high recovery prospects is possible, although the level of recoveries does not currently affect the rating in a material way.
-- The level of overcollateralisation (OC) of 9.8% to which DBRS gives credit.
The transaction was analysed with 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).
To assign ratings to new issuances, the following stressed assumptions are used: a CPCA of BB because BB is the lowest-tested stress level currently compatible with the AAA CB rating, and an LSF-L of AA (high) compatible with this level of CPCA.
Everything else being equal, provided 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 ratings. Based on the BB CPCA (level tested to assign ratings to new issuances), a downgrade of the CBAP by two notches to AA (low) would lead to a downgrade of the LSF-L by two notches to AA (low), resulting in a downgrade of the CB ratings by one notch.
In addition, all else unchanged, the CB ratings would be downgraded if any of the following occurred: (1) the sovereign rating of the Republic of France was downgraded below AA; (2) the relative amortisation profile of the CB and CP moved adversely; or (3) volatility in the financial markets caused the currently estimated market value spreads to increase; (4) 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 30 June 2019, the CP was composed of public sector assets equivalent to EUR 54.8 billion and substitute assets equivalent to EUR 3.1 billion. Roughly 88% 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 and Monitoring 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 50.6 billion OF currently outstanding, as at 30 June 2019, CAFFIL had other privileged liabilities that totalled EUR 640 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 30 June 2019 was EUR 54.8 billion and the substitute assets amounted to EUR 3.1 billion. All else unchanged, the EUR 0.05 billion proceeds of CB issued since the end of June 2019, result in a nominal OC ratio of 13.1%.
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 DBRS’s criteria. 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 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 6.9 years. This generates an asset-liability mismatch that is mitigated by the available OC.
DBRS has assessed the LSF related to the Programme as “Very Strong” according to its rating methodology. For more information, please refer to DBRS’s commentary “French Covered Bonds: Legal and Structuring Framework Review” and press release “DBRS Assigns AAA Rating to CAFFIL Public Sector Obligations Foncières,” both available at www.dbrs.com.
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 and Monitoring Covered Bonds”.
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 rating action.
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 and loan-by-loan data on the CP 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 rating, 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 24 July 2019, when DBRS assigned a AAA rating to the EMTN Series 2019-11 and discontinued its ratings on four series that had matured.
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 and Monitoring 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.