Rating action

Scope Ratings has today affirmed its AAA ratings with a Stable Outlook on the French covered bonds (obligations foncières) issued by Compagnie de Financement Foncier S.A. (CoFF), the fully owned subsidiary of Crédit Foncier de France, itself a wholly owned subsidiary of BPCE Group. Scope’s Stable Outlook on the covered bonds reflects its expectation of CoFF’s stable credit performance and unchanged fundamental support.

Key rating drivers

Sound issuer rating¹ (positive). The AA-/Stable rating of the issuer and its parent reflects CoFF’s close integration with BPCE Group (AA-/Stable), one of France’s leading banking franchises.

Fundamental credit support (positive). The strength of the French legal covered bond framework, together with resolution and systemic importance considerations, support an uplift of up to six notches to the issuer rating.

Rating-change drivers

Cover pool support would become a key rating driver upon an issuer downgrade of four notches or more. In such a scenario, cover pool support could stabilise the ratings up to an additional three notches assuming no material changes to the covered bond programme’s risk and protection structure.

The current covered bond ratings would only change if the issuer were downgraded by more than six notches.

The rating could also change in the unlikely event of European covered bond harmonisation negatively impacting Scope’s fundamental support assessment.

Quantitative analysis and assumptions

Scope also performed a cover pool analysis in order to assess the cover pool’s ability to provide additional support – should the issuer be downgraded by more than three notches. Scope’s projections of default for CoFF’s mortgage loans were made using an inverse Gaussian distribution. Based on credit performance data provided by the bank (‘90 days past due’ annual vintages between 2000 and 2016), Scope derived an effective lifetime mean default rate of 9.0% and a volatility of defaults (coefficient of variation) of 24.0%. Assumptions include an asset recovery rate of 95.0% in the base case and 57.0% in the most stressed scenario, based on recovery vintages provided by the issuer.

Scope used a market-standard portfolio analysis to estimate default statistics for the public sector pool, taking the exposure’s credit quality, its amortisation profile and asset correlation assumptions into account. A default distribution was derived for the cover pool using name-by-name credit assessments. A correlation framework accounting for geographical and issuer concentration was also applied. The resulting non-parametric default distribution has a mean default rate of 2.8% and a coefficient of variation of 100%. For each exposure, Scope applied obligor-type-specific stressed recovery rates ranging between 40.0% and 75.0%.

The resulting loss distribution and default timing were used to project the covered bond programme’s losses and reflect its amortisation structure. The analysis also incorporated the impact of rating distance-dependent interest rate stresses. The covered bond programme is most sensitive to a scenario in which interest rates increase after two years and plateau at 10% thereafter. Foreign exchange risk is fully mitigated via eligible derivatives.

Scope added a liquidity premium for French residential mortgage loans of 300 bps to the rating distance and scenario-dependent discount curve to calculate the cover pool’s net present value in the event of an asset sale. This reflects the large share of mortgages that are guaranteed but have high loan-to-value ratios, which Scope considers to be less liquid than ‘standard’ French mortgage loans. For the public sector pool, Scope applied a weighted average liquidity premium of 290 bps reflecting debtor type and location.

For the mortgage assets, Scope tested for low (0%) and high (up to 15%) prepayments to stress the programme’s sensitivity to unscheduled repayments. No prepayments were assumed for the public sector pool as these typically have no prepayment rights. The programme is most sensitive to low prepayments because a maturity mismatch would result in asset sales being necessary to make timely payments on the bonds.

Scope assumed recovery lags of 36 months for unguaranteed mortgage loans and 96 months at the most for guaranteed loans as it expects a significant delay on recovery proceeds due to the government guarantee. A 48-month recovery lag was also assumed for the public sector assets.

Scope assumed servicing fees of 25 bps for the mortgage loans and 10 bps for the public sector pool.

Rating driver references
1. Compagnie de Financement Foncier – Issuer rating

Stress testing
No stress testing was performed.

Cash flow analysis
For fundamental credit support-based covered bond ratings the detailed pool analysis is not a rating driver, hence no cash flow analysis is needed to establish the covered bond rating. Scope also tested to what extent the uplift could be supported by the cover pool analysis, however. The cover pool-supported rating uplift is based on a cash flow analysis using Scope’s covered bond model (CobEL version 1.0). The model applies rating distance-dependent stresses to scheduled cash flows to simulate the impact of increasing credit and market risks. The model outcome is the expected loss for a given level of overcollateralisation as well as the impact of stressed asset sales or variables such as changing prepayment speeds or servicing costs.

Methodology
The methodology used for this rating and rating outlook (Covered Bond Rating Methodology, 26 July 2019) is available on https://www.scoperatings.com/#!methodology/list.
The models used for this rating and rating outlook (Covered Bonds Expected Loss Model version 1.0 and Portfolio Model version 1.0) are available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Reber Acar, Senior Analyst
Person responsible for approval of the rating: Karlo Fuchs, Managing Director
The ratings/outlooks were first released by Scope on 7 February 2017. The ratings/outlooks were last updated on 17 April 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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