LONDON, May 9 (IFR) - Issues raised over the guaranteed
nature of part of the collateral pool of Credit Foncier de
France's RMBS deal have prompted the board of the Prime
Collateralised Securities industry body to consider revising its
criteria in order to enable guaranteed loans to obtain the
Ian Bell, head of the PCS Secretariat, said the French
transaction highlighted industry concerns about the future
treatment of this type of residential loan, which represents
more than half of the French market and a strong presence in the
"There is in principle no reason why we shouldn't grant
these mortgages the PCS label, so the PCS board is currently
looking at the possibility of revising our criteria to allow
that," Bell said.
The industry group is drawing up alternatives to its
"first-charge mortgage" criteria, which were set out at a time
when French RMBS deals were practically out of the picture, Bell
Foncier has been working on the deal, CFHL-1 2014, since last
year, and formally announced it on April 17 to market until
April 30. However, marketing was extended by a week as investors
questioned whether the 20% slice of the underlying pool
represented by guaranteed loans would cause the entire deal to
fall short of the liquidity coverage ratio criteria.
"Obviously, if there was the risk that the guaranteed
structure would impact the eligibility of the notes for the LCR,
then it would be quite important from an originator point of
view to pre-empt any future problem with regulators," said a
senior ABS analyst at a European bank.
Other market participants doubted that the LCR factor could
have been a show-stopper for the deal, however, which is now
back on track with lead managers Credit Suisse, Natixis (both
arrangers), JP Morgan, Lloyds Bank and RBS ready to open books
Nonetheless, the stretched timeframe seems to have ignited
debate on how regulatory uncertainty might end up pushing bank
investors hungry for LCR-eligible assets away from RMBS.
Under the original LCR criteria set by the Basel Committee
on Banking Supervision, Level 2B of the text sets out a clear
requirement for RMBS to be backed by first-lien residential
mortgages, which means transactions backed by guaranteed loans
would be left out.
The EU Capital Requirement Directive also outlines
additional rules for this type of loan, such as the disclosure
of the level of loan-to-income at the time of the origination.
According to the preliminary prospectus issued by Credit
Foncier, 77.4% of the EUR923m of underlying assets are direct
mortgages, while 18.8% are loans guaranteed by Credit Logement,
the largest guarantor in France.
The remaining 3.7% of the loans are insured by banks'
internal guarantors, "which creates some other restrictions,
because the financial strength of the guarantor depends on the
strength of the bank", said Jean-David Cirotteau, senior ABS
analyst and director at Societe Generale.
But overall, the problem with CFHL 2014-1's underlying
portfolio "is not a credit issue but a problem of wording and
definitions", Cirotteau said.
BETS OPEN ON FINAL LCR
Several parties said that as the EU version of the LCR is
yet to be finalised, as the European Banking Authority steered
clear from spelling out a limit on guaranteed loans, it may give
banks some room for trying to obtain assurance on guaranteed
Various associations are lobbying EU policy-makers - which
are expected to finalise the LCR definition at the end of June -
on the issue of the guaranteed loans, which account for as much
as 53% of the French residential loan market alone.
Officials from the European Commission, which will be
drafting the final CRD-LCR provision starting from the EBA
recommendations, said at a hearing in March that they were keen
to revisit the topic.
"It is something that we would like to understand a bit
better," a senior Commission official said at the time. And in
what may raise hopes about guarantee protection being eligible,
the official also said that "if it is just a strengthening of
the position, then we are very open to" revise the constraints
entailed in the Basel definition.
Meanwhile, whether LCR constraints would end up choking
demand from bank investors for RMBS remains an open question.
While banks represented the majority of RMBS buyers in
recent years, most may have already selected assets to cover in
full their future LCR requirement, an analyst said.
"It's too early to tell about the investor perception, but
the view would be that [guaranteed loans] could be fit under the
mortgage definition," a senior securitisation official said.
"Of course additional flexibility on loan types from the EBA
would be helpful, but perhaps ultimately not a big driver for
the European RMBS market," he added.
However, a report published by S&P this week reiterated how
current proposals risked scaring bank investors away from ABS,
towards more recognised sectors such as covered bonds, which
enjoy a better treatment under Basel rules.
Only certain RMBS can qualify for just 15% of a banks' stock
of high quality liquid assets, at a haircut of 25%, which
compares with a 10% discount for covered bonds.
But the issues raised by Credit Foncier's deal underpin
hopes for a regulatory relief.
"I am hopeful and maybe quietly confident that the European
Commission will be willing to step out of the Basel
straitjacket" on the rules for guaranteed loans, Bell said.
"And maybe even on the broader LCR criteria" for ABS, he
(Reporting by Anna Brunetti, editing by Anil Mayre)