RPT-Fitch affirms BNP SCF's covered bonds at 'AA+' upon D-cap change
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Aug 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed BNP Paribas Public Sector SCF's outstanding Obligation Foncieres (OF, French legislative covered bonds) at 'AA+'. The Outlook is Stable.
The affirmation follows the review of the Discontinuity Risk Assessment (D-Cap) to High Risk (D-Cap of 2) from Moderate Risk (D-Cap of 4), due to the reassessment of liquidity gaps and systemic risk component following a change in the liquidity protection mechanism for the programme.
KEY RATING DRIVERS
The 'AA+' rating is based on BNP Paribas' (BNPP, 'A+'/Stable/'F1') Long-term Issuer Default Rating (IDR) of 'A+', a Discontinuity Cap (D-Cap) of 2 (high risk) and over-collateralisation (OC) of 10% that Fitch takes into account in its analysis, which is above the 5.2% breakeven percentage for the 'AA+' rating. This allows the OF to be rated 'AA' on a probability of default (PD) basis, plus a one-notch uplift for recoveries to attain a 'AA+' rating. The Outlook on the OF is stable, in line with that of the French and UK sovereigns, which are the lowest-rated sovereigns represented in the pool.
The change in the D-Cap is due to a revision of the liquidity gap and systemic risk component to 'High' from 'Moderate' following a shortening of the pre-maturity test period. Fitch's previous analysis was notably based on a 12 months pre-maturity test under which BNP Paribas would have to include liquid assets covering the bonds maturing in the following 12 months at the loss of 'F1+' by BNP Paribas. However, this commitment has been revised and changed to a six months pre-maturity test. This would increase the discontinuity risk following a default of BNP Paribas, as it shortens the time available to bridge liquidity gaps to six months from 12 months. This could be challenging, given the limited liquidity of export credit agencies (ECA) loans and the small number of potential buyers for the ECA guaranteed loans.
BNP SCF's cover pool consists mainly of export and aircraft loans benefiting from guarantees granted by ECA, with exposures to five sovereigns: France, Germany, the UK, the US and Denmark. As an exception to its Global Rating Criteria for Single and Multi-Name Credit-Linked Notes, the pool's credit risk is analysed on a weakest link approach, with the default risk of the collateral being equivalent to that of the lowest-rated sovereign (see 'Global Rating Criteria for Single and Multi-Name Credit-Linked Notes', published 21 February 2013 at www.fitchratings.com).
The 'AA+' rating would be vulnerable to a downgrade, all else being equal, if one of the following occurred: BNPP's IDR was downgraded to 'A-'; the D-Cap fell to 0 (full discontinuity); the OC level decreased below 5.2%, which is the minimum OC in line with the 'AA+' covered bonds rating; the cash held with BNPP was considered as excessive, which could occur if this amount was more than what is due on the bonds over the next 12 months, as per Fitch's counterparty criteria; or if one of the sovereign exposures in the cover pool was downgraded below 'AA+'.
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