TEXT-S&P puts CFiF covered bond program on watch negative

Wed Dec 19, 2012 1:10pm EST

OVERVIEW
     -- On July 12, 2012, our updated criteria for assessing counterparty risk 
in covered bonds became effective. We had six months from that date to update 
all ratings based on the updated criteria.
     -- Compagnie de Financement Foncier (CFiF) provided an action plan for 
its covered bond program to address the updated criteria by the transition 
date, on Jan. 11, 2013. 
     -- In the absence of final documentation and as the Jan. 11, 2013 
deadline approaches, we now believe that there is an increased likelihood that 
CFiF will not implement the plan fully by the end of the transition period.
     -- Accordingly, we have placed on CreditWatch negative our long- and 
short-term ratings on CFiF's covered bond program.
     -- We intend to resolve this CreditWatch placement by either affirming or 
lowering the ratings on or before Jan. 11, 2013.
  
LONDON (Standard & Poor's) Dec. 19, 2012--Standard & Poor's Ratings Services 
today placed its ratings on the covered bond program and related series issued 
by Compagnie de Financement Foncier (CFiF) on CreditWatch with negative 
implications (see list below). 

The rating actions follow our review of the covered bond program's exposure to 
counterparty risk and the progress being made by the issuer to mitigate risks 
in line with our criteria.

On May 31, 2012, we updated our methodology and assumptions for assessing 
counterparty and supporting party risk (collectively "counterparty risk") in 
covered bonds. We believe that there is an increased likelihood that CFiF's 
covered bond program may not fully meet the criteria by Jan. 11, 2013 (see 
"Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions," and "Counterparty Risk Framework Methodology And Assumptions").

We have been in regular contact with the issuer to monitor its progress in 
implementing its action plan and amending the program documents to bring them 
in line with the updated criteria by Jan. 11, 2013, the end of the transition 
period. 

Based on the information received from the issuer, we are currently of the 
opinion that derivative-related risks for this program are currently not fully 
covered in line with our criteria. In particular, termination payments that 
would arise if a derivative contract ends prematurely and could be due by CFiF 
to the counterparty are not subordinated to the covered bondholders. For a 
significant number of swaps in the transaction this risk of exposure to 
termination payments is not yet mitigated by a replacement framework according 
to Standard & Poor's methodology. Therefore, the transaction rating could be 
limited to one notch above the issuer credit rating on CFiF in accordance with 
paragraph 36 of "Covered Bonds Counterparty and Supporting Obligations 
Methodology and Assumptions," unless these swaps represent less than 5% of the 
outstanding covered bonds after actions by the issuer to address the 
counterparty risks. 

Moreover, the additional termination event language, which gives the issuer 
the option to terminate the swap agreement if there is no mutually accepted 
replacement, and which is present in most of the transaction's swaps, has not 
yet been clarified in line with paragraph 38 of "Covered Bonds Counterparty 
and Supporting Obligations Methodology And Assumptions." In the absence of 
such clarification, we would consider that these swaps do not have a 
replacement framework reflective of Standard & Poor's methodology. This would 
lead us to consider that they cannot be relied upon for the life of the 
transaction, and we would therefore exclude these swaps from our cash flow 
modeling. Furthermore, these swaps would then add to the number for which 
potential termination payments limit the ratings on the covered bond program.
 
The information provided by the issuer demonstrates its willingness to address 
the counterparty risks in its program through amending some swap contracts, 
possibly introducing covenants to mitigate the impact of termination payments, 
and by increasing overcollateralization to cover any unhedged risk in order to 
maintain the current rating on the covered bonds. However, we have not yet 
received the full documentation of these actions and therefore believe there 
is a risk that CFiF may not have implemented its intended changes by the 
transition deadline of Jan. 11, 2013. 

If the issuer does not take any action to address the counterparty risks, and 
based on the currently available information, we could downgrade the program 
by up to four notches. 

We will resolve the CreditWatch placement following our credit and cash flow 
analysis, and our final review of program-specific details in the then current 
documentation, including further progress made in mitigating identified risks. 
As a result, we will either affirm or lower the ratings on CFiF's covered bond 
program on or before Jan. 11, 2013.

RELATED CRITERIA AND RESEARCH
     -- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012
     -- Issuers' Delays In Meeting Updated Covered Bond Criteria Might Lead To 
Several CreditWatch Placements, Nov. 26, 2012
     -- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 
2012
     -- Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions, May 31, 2012
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Understanding Standard & Poor's Rating Definitions, June 3, 2009
     -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 
2008
  
RATINGS LIST
Program/Rating
Country: Covered Bond Type

RATINGS PLACED ON CREDITWATCH NEGATIVE
Covered Bond Program And Related Series Issued By Compagnie de Financement 
Foncier (CFiF)
                            To                From
Long-Term Credit Rating     AAA/Watch Neg     AAA/Stable 
Short-Term Credit Rating    A-1+/Watch Neg    A-1+
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