Rating action

Scope Ratings GmbH (Scope) has today affirmed its AAA rating 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. The rating Outlook is Stable.

Rating rationale

Solid issuer rating (positive)¹. The A+/Stable rating of the issuer and its parent reflects CoFF’s close integration with BPCE Group, one of France’s leading banking franchises.

Governance support (positive)². Governance support is the primary rating driver. It provides the covered bonds with six notches of uplift above the issuer rating. Only four notches are needed to raise the covered bond rating to the highest achievable level (ESG Factor).

One or more key drivers of the credit rating action are considered an ESG factor.

Rating-change drivers

Scope’s Stable Outlook on the covered bonds reflects a rating buffer of five notches, including three notches of potential cover pool support. The ratings may be downgraded upon: i) an issuer rating downgrade by more than five notches; ii) a deterioration in Scope’s view on governance support factors relevant to the issuer and French covered bonds in general; or iii) an inability of the cover pool to provide an uplift if the issuer rating is downgraded by more than two notches.

Quantitative analysis and assumptions

Cover pool support (positive)³. Scope’s cover pool analysis provides additional rating stability. This is reflected by:

1. Cover pool complexity category (positive). Scope has assigned the interplay between complexity and transparency a CPC category of ‘low‘, allowing for a maximum additional uplift of up to three notches on top of the governance support uplift.
    
2. Overcollateralisation (positive). The 15.5% of overcollateralisation as of 30 June 2023 can shield the current AAA rating against an issuer downgrade of up to five notches.
    
3. Sound credit quality (positive). The EUR60bn highly granular and mixed cover pool is comprising public-sector exposures and seasoned mortgage loans. It has a strong credit quality, posing low credit risk. The public sector portfolio accounts for 45.1% and benefits from 75.6% of French sovereign and sub sovereign exposure. Another 10.9% account for Italian loans and bonds of which 7.5% are sovereign exposure. This is followed by the US (5.0%) and Switzerland (4.3%). The mortgage loan portfolio accounting for another 44.1% benefits from recoveries of the available collateral (either as ‘caution’ or a mortgage) but also from additional support in the case of government-supported mortgage products (guarantees provided by the government via the Société de Gestion des Financements et de la Garantie de l’Accession Sociale à la propriété or SGFGAS). The latter account for around half of the mortgage book. Less than 2% of the mortgage portfolio account for commercial loans. The mortgage sub-portfolio has a moderate average indexed LTV of 62.6% and high seasoning of 8.2 years. The remaining cover pool balance stems from 9.8% of substitute assets mainly in the form of secured intra group exposures with maturities of up to one year.
    
4. Market risks (moderate). Market risks are moderate reflecting the issuer’s foreign currency and interest rate hedging as well as cash flow matching strategy. Post hedge, assets and liabilities are both EUR denominated and around half of the assets are paying fixed rate while 64% of the covered bonds paying a fixed rate coupon. This interest rate mismatch has increased but is positive to the programme’s excess spread driven by an increase share of floating interest compared to our analysis one year ago. Maturity mismatches are relatively low and benefit from the well matches profiles with the asset’s weighted average life of 7.8 years that compares to 6.9 years for the covered bonds. Still, the programme remains to be most exposed to a scenario of low prepayments (1%) in combination with rising rates (after 4 years plateauing at 10% and reconverting to 5% after another 5 years).

Scope performed a cover pool analysis to assess the cover pool’s ability to provide additional support should the issuer be downgraded by more than two notches.

Scope’s projections of default for CoFF’s mortgage loans are unchanged and were made using an inverse Gaussian distribution. Based on credit performance data provided by the bank (’90 days past due’ annual vintages), Scope derived an effective lifetime mean default rate of 2.2% and a volatility of default (coefficient of variation) of 150.0%. Assumptions included an asset recovery rate of 95.0% in the base case and 70.0% in the most stressed scenario.

Base case recovery rates reflect the recovery vintages as provided by the issuer. Scope applied rating distance-dependent market value declines to establish stressed recovery rates. Assumptions reflect French housing market developments and specificities. Scope also applied a fire-sale discount of 20%, reflecting a value discount on properties sold under non-standard market or distressed conditions. Scope’s stressed total security value haircut for properties securing mortgage loans in France is 52.5%.

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 is characterised by a mean default rate of 1.9% and a coefficient of variation of 125%. 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 four years and plateau at 10% thereafter. Foreign exchange risk is fully mitigated via eligible derivatives.

Scope added a 300 bp liquidity premium for French residential mortgage loans 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 the standard French mortgage loan. For the public sector pool, Scope applied a weighted average liquidity premium of 281 bp reflecting the debtor type and location.

For the mortgage assets, Scope tested for low (1%) 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 bp for the mortgage loans and 10 bp for the public sector pool.

The substitute assets have not been modelled as the programme is governance supported. Instead, its balance have been conservatively added to the mortgage sub-portfolio by keeping the portfolios interest rate distribution unchanged.

Rating driver references
1. Compagnie de Financement Foncier – Issuer rating
2. Governance support assessment SCF
3. Confidential quarterly cover pool reporting (Confidential)

Stress testing
No stress testing was performed.

Cash flow analysis
The Credit Rating uplift is based on a cash flow analysis using Scope Ratings’ covered bond model (Covered Bonds Expected Loss Model Version 1.1). The model applies Credit 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.

Methodology
The methodology used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 24 May 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating and Outlook are (Covered Bonds Expected Loss Model Version 1.1, Portfolio Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed.
Lead analyst: Mathias Pleißner, Senior Director
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 7 February 2017. The Credit Rating/Outlook was last updated on 2 November 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis 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.