Nov 26 - Fitch Ratings has affirmed Caisse de Refinancement de l'Habitat's
(CRH) covered bonds at 'AAA' and revised the Outlook to Stable. CRH's bonds are
all fixed-rate with hard bullet maturities, and total EUR54.13bn.
The affirmation is based on CRH's creditworthiness, which reflects the credit
quality of its main shareholders, a revised Fitch Discontinuity Cap (D-Cap) of 3
(Moderate High) assigned to CRH's bonds, and a minimum over-collateralisation
(OC) of 32.2% which Fitch gives credit to.
The change in D-Cap is due to a revision of the liquidity gap and systemic risk
component from 'High' to 'Moderate High'. Fitch's previous understanding was
that each shareholder's commitment to provide liquidity would be limited to 5%
of their respective borrowing. However, based on additional information received
by Fitch, this commitment is now assessed as joint and several, so that if a
shareholder were to default, the shortfall would need to be funded by the
remaining, solvent shareholders. Nevertheless, despite the slightly higher
liquidity provisioning, the commitment could still prove insufficient to achieve
a timely payment upon the default of a larger shareholder in upcoming years. As
such, the D-Cap continues to reflect the likelihood that systemic support for
CRH bonds would be forthcoming in such a scenario, and that shareholders may
provide liquidity above 5% of outstanding bonds if needed.
The revision of the Outlook is driven by the larger cushion before a downgrade
of CRH's main shareholders would cause a downgrade of its bonds. Therefore the
Negative Outlook of three of CRH's main shareholders: Credit Agricole/Le Credit
Lyonnais (CASA/LCL, 'A+'/Negative/'F1+'), Societe Generale/Credit du Nord
(SG/CN, 'A+'/Negative/'F1+') and Groupe BPCE (GBPCE, 'A+'/Negative/'F1+'), which
together account for 57% of CRH's promissory note exposures (billets de
mobilisation, or BDMs) no longer applies to CRH's bond ratings.
In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be
vulnerable to downgrade, all else being equal, if one of the following occurred:
the D-Cap assigned to CRH's bonds was decreased to 1 or 0; if Fitch's view on
CRH's creditworthiness, based on the IDRs of all its main shareholders, worsened
by two or more notches; or if the OC between the cover pools and the BDMs were
to drop below 26%, which is the breakeven OC level for the rating .
Fitch gives credit to the lowest observable OC over the last 12 months, for the
period ending 30 September 2012, which is 32.2%. This allows CRH's bonds to
attain 'AA+' on a probability of default basis, and 'AAA' after factoring in
stressed recoveries on bonds assumed to be in default. As there is no
cross-collateralisation between cover pools of other shareholders upon a default
of one particular shareholder under its BDMs, this is measured on an individual
shareholder basis. However, the 0.02% exposure to the smallest contributor is
disregarded, given that CRH's equity far exceeds their individual exposure. CRH
requires each shareholder to supply at least 25% OC, and may increase this
percentage depending on the characteristics of the loans they pledge. In
practice, individual OC per shareholder varies from 32.5% to 59.2% as of
end-September 2012, disregarding the smallest contributor. The breakeven OC in
line with the covered bond rating will be affected, among others, by the profile
of the cover assets relative to outstanding covered bonds, which can change over
time, even in the absence of new issuances. Therefore it cannot be assumed to
remain stable over time.
As of end-September 2012, the aggregate underlying pool securing the BDMs
comprised 897,889 loans with a total outstanding balance of EUR75.7bn. The
average current loan-to-value ratio was 54.3%. A total 77.9% of the pool was
secured by a first-lien mortgage and the remaining portion was guaranteed by
specialised institutions, mainly Credit Logement. All the loans were performing.
In a 'AAA' scenario, Fitch calculated an expected loss of 10.4% for the
underlying cover pools.
The BDMs match CRH's bonds in terms of maturity, currency and interest rates.
However, following a borrowing entity's potential default, CRH will receive cash
flows from the pledged collateral, creating the potential for maturity, interest
rate and currency mismatches. There is no privileged interest rate swap to
prevent mismatches in such an event.
The weighted average residual maturity of CRH bonds is 6.2 years, compared to
8.3 years for the collateral assets. As of 30 September 2012, 89.4% of the
underlying loans yield a fixed rate of interest. The resulting market value risk
in a high interest rate scenario is a main driver of the 26% breakeven OC for
the 'AAA' rating.
The majority of bonds, BDMs and assets in the pledged cover pools are
euro-denominated. Although 3.1% of total covered bonds are denominated in CHF,
these are backed by BDMs also denominated in CHF. Therefore exposure to foreign
exchange risk would be limited to a possible mismatch between the euro sale
proceeds of a property situated in France versus a loan denominated in CHF,
which would materialise only if the underlying borrower defaults.
CRH is a French regulated credit institution set up in 1985, the sole purpose of
which is to refinance residential loans originated by its shareholders.
In accordance with Fitch's policies the issuer appealed and provided additional
information to Fitch that resulted in a rating action that is different than the
original rating committee outcome.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 September 2012,
'EMEA Residential Mortgage Loss Criteria', dated 07 June 2012, 'EMEA Criteria
Addendum - France', dated 27 July 2012', are available on www.fitchratings.com.
Applicable Criteria and Related Research:
Covered Bonds Rating Criteria - Amended
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - France - Mortgage and Cashflow Assumptions