Scope Ratings today has assigned Long-Term Ratings of AAA with a Stable Outlook to the covered bonds issued by Société Générale SA issued out of its subsidiary Société Générale SFH (Obligation d’habitat or OH) or Société Générale SCF (Obligation Foncieres or OF).

The covered bond ratings reflect Société Générale SA’s Issuer Credit-Strength Rating (ICSR) of A/Stable/S-1 (Société Générale Issuer Rating Report published 9 June 2015) which we use as the analytical anchor point for the covered bond ratings issued out of the SFH or the SCF. It also reflects the fundamental credit support of the French legal covered bond framework and national implementation of the bank recovery and resolution regime. Combining the fundamental credit support for covered bonds produces a credit differentiation of six notches to the parent bank’s ICSR. These ratings do not take into account the potential further credit support of up to additional three notches the cover pool analysis could provide.

Fundamental assessment supports a high credit differentiation above the bank’s rating.
To determine the fundamental uplift we have analysed the French legal and resolution framework based on our methodology and conclude that both covered bond types issued by Société Générale’s subsidiaries benefit from the maximum uplift of six notches from Société Générale’s rating. (For more details see the French section in Covered Bond Framework Analysis – Analytical considerations, 31 July 2015).

Legal framework analysis
In our legal framework analysis we conclude that the French legal covered bond framework allows for a maximum credit differentiation of two notches. It ensures that covered bonds are not impacted by the parent’s insolvency. This is relevant as in France cover assets are typically originated and remain serviced by the parent bank. The legal provisions provide for the maintenance of the cover pool which supports the ongoing full and timely payment of outstanding covered bonds upon restructuring or insolvency with available proceeds. The latter is helped by the provision to maintain additional liquid assets to cover potential liquidity shortfalls within the next 180 days. Relevant programme enhancements, in particular mandatory and voluntary overcollateralisation are available, valid and enforceable even after regulatory intervention. Even though the setup of French covered bond issuers is very similar to a special purpose entity – whether issued by an SCF or an SFH – the issuers need to maintain active risk management to benefit the covered bonds. Adherence to regulatory requirements is monitored regularly by an independent third party as well as the French banking regulator.

Resolution regime analysis
In our resolution regime assessment we analyse the French implementation of the Bank Recovery and Resolution Directive (BRRD) and the incentives that avoid a regulatory intervention on the issuer that also impacts the covered bond’s credit quality and impairs its ongoing performance. We conclude that we can assign the full four notches of credit differentiation for French covered bonds.

Full implementation of the BRRD, according to the proposal of the European Commission, is still outstanding in France. However, the current French resolution regime (law 2013-672 of 26 July 2013) already provides the relevant protection we believe is necessary to achieve beneficial treatment under our methodology.

As Société Générale is systemically important in its market, we believe it is in the public interest that it be recapitalised in a resolution rather than placed into insolvency. Accordingly, we expect that eligible liabilities that are not excluded by the respective resolution authorities be bailed in towards the recapitalisation process. We view Société Générale as having a substantial cushion of eligible liabilities for bail-in – capital securities, other subordinated liabilities, and long-term senior unsecured debt – which represent a reassuringly ample protection for its covered bonds. In our view, a scenario in which bailed-in eligible liabilities are inadequate to stem losses and recapitalise the bank would be highly implausible.

The resolution regime-based credit differentiation also takes the high systemic relevance of French covered bonds into account. The share of outstanding French covered bonds as well as annual new issuance typically ranks among the top five worldwide (EUR 325bn outstanding vs. annual issuance of EUR 26bn in 2014). French covered bonds are used by all major banking groups and the share of covered bonds compared to GDP stood at 15% at the end of 2014. To date, France has not seen any covered bond defaults. Support for covered bond issuers in distress was evident when Dexia Group – one of the largest providers for domestic public sector lending, as well as one of the largest covered bond issuers worldwide – was bailed out. We believe that stakeholders will ensure the formal translation of the BRRD will not impact the importance of covered bond funding and that there is a strong alignment of interests to maintain covered bonds as a going concern – even when the issuer is subject to regulatory intervention. The systemic importance of covered bond funding in France is expected to remain high. In our view, stakeholders are highly incentivised to support the product.

We believe the high systemic importance will incentivise regulators to use the resolution framework without impairing the functioning of covered bonds and generally allow a credit differentiation of four notches for the benefits of the resolution regime.

Cover pool benefit not factored into the ratings
Société Générale is issuing covered bonds using two different legal entities and issuing two different covered bond types – whose legal basis is broadly aligned. This setup is common for most French banks and reflects the different definition of cover assets eligibility criteria under the respective covered bond acts. Société Générale’s OH’s are issued by Société Générale SFH. The cover pool of the SFH comprises residential mortgage loans and guaranteed home loans (prêts cautionnés) originated by Société Générale. As is typical for French mortgage loans, the majority of loans in the cover pool are not directly secured with a mortgage, but with a guarantee from a credit guarantee agency.

Obligation Foncieres are issued by Société Générale SCF. The cover pool comprises export finance loans that benefit from the guarantee of an eligible public sector export credit agency.

For the unsolicited ratings we have not analysed the cover pools. Both cover pools exhibit differences in credit quality, cash flow structure and protection levels provided (overcollateralisation). These can impact the assessment and potential additional credit differentiation from the rating analysis of the cover pool which could support an additional credit differentiation of up to three additional notches.

Rating change drivers
The fundamental analysis-based uplift allows us to assign AAA ratings to Société Générale’s covered bonds regardless of whether they are issued as OH by Société Générale SFH, or OF by Société Générale SCF. Both covered bond types benefit from a rating buffer of two notches which means that current covered bond ratings could sustain at least a two-notch downgrade of the issuer and still maintain their ratings. Further rating stability could be provided from the cover pool rating analysis which may further enhance the ratings by three additional notches. Rating drivers for the covered bonds therefore mirror the rating drivers for the issuer.
We currently do not expect changes that could impact our assessment of the fundamental rating drivers for Société Générale’s covered bonds

The following ratings were assigned to Société Générale covered bonds:

- Société Générale SFH, senior secured French mortgage covered bonds (OH), AAA/ Stable
- Société Générale SCF, senior secured French public sector covered bonds (OF), AAA/ Stable

The ratings assigned to Société Générale’s covered bonds are (i) based on public information, (ii) not solicited by the issuer and (iii) without issuer participation in the process.

Related Research:
Société Générale Issuer Rating Report published 9 June 2015
Covered Bond Framework Analysis – Analytical considerations, published 31 July 201

Important information

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility

The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Karlo Fuchs, Executive Director.
Responsible for approving the rating: Dr. Stefan Bund, Chief Analytical Officer.

The rating concerns financial instruments which were evaluated for the first time by Scope Ratings AG. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest

The ratings assigned to Société Générale covered bonds are (i) based on public information, (ii) not solicited by the issuer and (iii) without issuer participation in the process.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating

Available public information provided to investors by the issuer, official publications and data series by the central bank, regulators and research from reputable market participants. Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication

Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology

The methodology used for the rating assessment is “Covered Bond Rating Methodology” published in July 2015 as well as “General Structured Finance Rating Methodology” published 28 August 2015. The methodologies are available on www.scoperatings.com.
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