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April 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned FCT Evergreen HL1 (FCT or the issuer) totalling EUR10bn the following ratings:
Class A1, EUR1bn floating rate notes due 2016, legal final maturity date 2046; ‘AAA’; Outlook Stable
Class A2, EUR9bn floating rate notes due 2017, legal final maturity date 2046; ‘AAA’; Outlook Stable
The ‘AAA’ rating is based on the Long-term Issuer Default Rating (IDR) of Credit Agricole S.A. (CASA, ‘A+'/Negative/‘F1+'), a Discontinuity Cap (D-Cap) of 8 (minimal discontinuity) and the contractual asset percentage (AP) of 87.7%. This level allows the notes to be rated ‘AAA’ on a probability of default basis. The FCT is not intending to issue further notes; therefore Fitch takes into account the contractual AP which compares with the agency’s breakeven AP of 90%. CASA acts as the main debtor of recourse and Fitch uses its IDR as the reference IDR in its analysis. The agency applied its covered bonds rating criteria to assess the notes, due to the dual recourse nature of the transaction, first against a financial institution (CASA) and second to a pool of housing loans.
The D-Cap of 8 for this programme reflects the minimal risk of discontinuity of payments under the notes assuming an insolvency of CASA due to the programme reverting to pass-through, should CASA default on the refinanced secured advances. The D-Cap also reflects the EUR50m pre-funded liquidity reserve, which will adjust over time if CASA’s IDR falls below ‘A’/‘F1’ to overcome liquidity shortfalls on interest payments due on the notes. These result in a minimal discontinuity risk assessment of the liquidity gaps and systemic risk component of the D-Cap.
Fitch has assessed asset segregation as representing a moderate discontinuity risk and takes into account the satisfactory segregation of the collateral pool from the bankruptcy estate of the collateral providers, despite residual asset claw back and set-off risks stemming from the underlying borrowers. The same moderate risk assessment is applied to privileged derivatives which are undertaken by CASA, the main debtor of recourse.
A moderate high risk assessment applies to the cover pool-specific alternative management section of the D-Cap, based on the capable in-house developed IT system but taking into account the specifics of the management of residential loans originated by 39 caisses regionales and Le Credit Lyonnais. However the agency’s risk assessment of the systemic alternative management component is very low and incorporates the expected ease of transition to an alternative manager since there is no need to liquidate the cover assets under a pass-through structure.
The FCT’s assets comprise advances made by Credit Agricole Corporate and Investment Bank (CACIB, A+/Negative/F1+) to CASA. The advances are secured by French housing loans originated by entities of the Credit Agricole group. As of 31 March 2013, the pool consisted of approximately 362,000 residential loans with an aggregate outstanding balance of EUR12.7bn. About 80% are housing loans guaranteed by Caisse d‘Assurances Mutuelles du Credit Agricole, while the remaining 20% is guaranteed by Credit Logement. In a ‘AAA’ stress scenario, Fitch has calculated a cumulative weighted average (WA) frequency of foreclosure of 16.8% and a WA recovery rate of 41.8%, resulting in a 9.8% AAA expected loss for the cover pool.
Approximately 81% of the pool comprises fixed-rate loans, while the notes pay a floating rate of interest, indexed to three-month Euribor. Interest rate swaps are in place with CASA to hedge interest rate mismatches between assets and notes upon inception of the programme.
The Stable Outlook on the notes rating is driven by the agency’s stable expectations for both the cover assets and over-collateralisation maintenance. Although the Outlook on France’s sovereign (‘AAA’/‘F1+') and CASA rating is Negative, a one-notch downgrade would not lead to a downgrade of the notes.
The notes’ ‘AAA’ rating would be vulnerable to downgrade if any of the following occurred: (i) CASA’s IDR fell to ‘BB’ or below; or (ii) the D-Cap fell to 1 (very high discontinuity risk) or 0 (full discontinuity); or (iii) the transaction AP exceeded 90%, which is the breakeven level calculated by Fitch in line with the ‘AAA’ rating.
The Fitch breakeven AP will be affected, among others, by the profile of the cover assets relative to outstanding notes, which can change, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.