DBRS Ratings GmbH (DBRS Morningstar) 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). At the same time, DBRS Morningstar discontinued its ratings on five series that had matured. The rating actions follow the completion of a full review of the Programme.
There are 461 series of covered bonds (CB) outstanding under the Programme, in different currencies, totalling an equivalent amount of EUR 51.0 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 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 ratings in a material way.
-- The level of overcollateralisation (OC) of 10.5% 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 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 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 ratings. Based on the CPCA of BB (level tested to assign 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 ratings.
In addition, all else unchanged, the CB 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 CB and CP moved adversely; (3) volatility in the financial markets caused 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 changed adversely to a degree that a one-notch uplift for good recovery prospects could no longer be granted.
As of 30 June 2022, the CP was composed of public-sector assets equivalent to EUR 58.9 billion and substitute assets equivalent to EUR 0.6 billion. Roughly 91% 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 “Rating and Monitoring Covered Bonds” methodology, in this circumstance, the rating on the CB is typically capped at three notches higher than the rating on the sovereign.
In addition to the EUR 51.0 billion in OF currently outstanding, as at 30 June 2022, CAFFIL had other privileged liabilities that totalled EUR 36 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 59.5 billion, yielding a current nominal OC ratio of 16.6%.
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 7.27 years while that of the CBs is 7.18 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 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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating and Monitoring Covered Bonds” (22 April 2022).
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.
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 rating action.
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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.
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/baseline-macroeconomic-scenarios-application-to-credit-ratings.
The sources of data and information used for these ratings include investor reports and loan-by-loan data on the CP as at 30 June 2022 and 31 March 2022, respectively, containing 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 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 ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar 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 28 June 2022, when DBRS Morningstar assigned a AAA rating to the EMTN Series 2022-9 notes.
Information regarding DBRS Morningstar 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://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Tomás Rodríguez-Vigil, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 10 September 2018
DBRS Ratings GmbH, Sucursal en España
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating and Monitoring Covered Bonds (22 April 2022),
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (22 April 2022),
-- Modelling Assumptions for Portfolios of Public Sector Exposures (26 July 2022) and Public Sector Model v 0.2.1, https://www.dbrsmorningstar.com/research/400385/modelling-assumptions-for-portfolios-of-public-sector-exposures.
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022),
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021),
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021),
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021),
-- Global Methodology for Rating Sovereign Governments (9 July 2021),
-- Currency Stresses for Global Structured Finance Transactions (4 February 2022),
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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 firstname.lastname@example.org.