(The following statement was released by the rating agency)
Aug 31 -
-- We have assigned preliminary ‘AAA’ ratings to Credit Agricole Public Sector SCF’s covered bond program and inaugural issuance of French covered bonds.
-- The outlook is stable.
-- The issuance is the first under Credit Agricole S.A.’s EUR10 billion medium-term note program.
-- These ratings are based on our criteria for rating covered bonds. However, the methodologies and assumptions underlying these criteria are under review. The ratings on all outstanding covered bonds in this program may be affected as a result of this review.
Standard & Poor’s Ratings Services today assigned its preliminary ‘AAA’ credit ratings to the covered bond program and inaugural issuance of “Obligations Foncieres” (OFs; French legislation-enabled covered bonds) issued by Credit Agricole Public Sector SCF (CA PS SCF). The outlook is stable.
The issuer is a “societe de credit foncier” (SCF; a special-purpose financial institution) owned by Credit Agricole S.A. (CASA; A/Stable/A-1). The issuance is the first under CASA’s EUR10 billion medium-term note program. The SCF’s set-up and the cover pool’s asset composition are similar to other French public-sector covered bonds. Under our criteria for rating covered bonds, we therefore categorize the program in category 1.
Key features of the covered bond program include:
-- The first issuance of OFs is expected to take place in September 2012, and to be equal to EUR1.0 billion. The first issuance and all subsequent OF issuances will constitute unsubordinated senior secured obligations and will rank pari passu among themselves.
-- The preliminary ratings assigned to this issuance reflect our level of comfort in the French legal framework for the issuance of covered bonds and the credit quality of the underlying assets and their cash flows.
-- This issuance, and any further issuances under the program, will be backed by a portfolio of public sector loans. The initial cover pool consists of loans backed by sovereigns, all of which we currently rate ‘AA+’ or ‘AAA’.
The covered bond rating process employed primarily follows the methodology and assumptions outlined in our “Covered Bond Ratings Framework” criteria published June 26, 2012.
We have based our preliminary ‘AAA’ ratings on the covered bonds on a five-notch uplift above the issuer credit rating (ICR) on CASA, to which CA PS SCF is core.
After the first issuance, CA PS SCF’s covered bonds will have an asset-liability mismatch (ALMM) risk classification of “low.”
CA PS SCF’s covered bonds can achieve a maximum potential ratings uplift above the ICR on CASA of seven notches. We are of the opinion that the target credit enhancement level sufficient to achieve the highest potential uplift would vary in the range of 33.84% to 37.93%, depending on the maturity of the first issuance. After the first issuance, the available credit enhancement of 38.51% will exceed the target credit enhancement. We therefore consider that the maximum achievable rating on CA PS SCF’s covered bonds is ‘AAA’. This represents five notches of uplift above the ‘A’ long-term ICR on CASA.
We have assessed counterparty risk using our criteria articles “Counterparty Risk Framework Methodology And Assumptions,” and “Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions,” both published May 31, 2012. These criteria are effective for covered bonds since July 12, 2012. We consider that counterparty risks in the transaction are mitigated in line with these criteria, and therefore counterparty risk does not reduce the maximum achievable rating on CA PS SCF’s covered bonds.
Finally, we also consider country risk as set out in our criteria article “Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions,” published June 14, 2011. In our credit and cash flow analyses we have only considered a reduced sub-pool with “low exposure” to French country risk, consisting of about EUR1.4 billion of assets, of which 40% are loans backed by the French sovereign. In our view, therefore, the ratings on the covered bonds are not currently capped by the French sovereign rating.
The stable outlook on CA PS SCF’s covered bonds reflects our view that country risk does not currently cap the rating. There are two notches between the ratings on the covered bonds and the ICR on CASA, meaning that if we were to lower the ICR on CASA or change the ALMM classification, it would not result in an automatic downgrade of the covered bonds. We also consider that CASA has sufficient eligible assets to increase overcollateralization in order to maintain the maximum potential uplift of five notches above the ICR, if we change our view of the target credit enhancement level due to deteriorating asset (or guarantor) credit quality.
Today we have also published a presale report providing further detail of our analysis of this covered bond program.
POTENTIAL EFFECTS OF PROPOSED CRITERIA CHANGES
We have assigned our preliminary ratings on these covered bonds based on our criteria for rating covered bonds (see “Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds,” published Dec. 16, 2009). The assumptions and methodologies used in the credit and cash flow analysis are currently under review (see “Advance Notice Of Proposed Criteria Change: Methodologies And Assumptions For Rating Certain Covered Bonds And CDOs,” published Aug. 5, 2010).
The scope of our review of the analysis of public-sector assets may include our default rate stresses, correlation assumptions, recovery levels, model risk, concentration limits, and credit enhancement levels. Further, as part of our cash flow analysis, we used Standard & Poor’s Covered Bond Monitor to calculate the target credit enhancement for the covered bonds. The assumptions and methodologies used in this cash flow analysis are also under review.
This review may result in further changes to the criteria. As a result, our future assumptions and methodologies may differ from our current criteria. The criteria change may affect the ratings on all outstanding covered bonds in this program. Until such time that we adopt new criteria for rating covered bonds, we will continue to rate and surveil these covered bonds using our existing criteria (see “Related Criteria And Research”).
RELATED CRITERIA AND RESEARCH
-- Presale: Credit Agricole Public Sector SCF (Obligations Foncieres), Aug. 31, 2012
-- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 2012
-- Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012
-- Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012
-- Request For Comment: Methodology For Assessing Operational Risk In Structured Finance Transactions, Oct. 4, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Advance Notice Of Proposed Criteria Change: Methodologies And Assumptions For Rating Certain Covered Bonds And CDOs, Aug. 5, 2010
-- Methodology: Credit Stability Criteria, May 3, 2010
-- Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009
-- Understanding Standard & Poor’s Rating Definitions, June 3, 2009
-- Rating Sovereign-Guaranteed Debt, April 6, 2009
-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008
-- CDO Spotlight: Rating Approach To Synthetic CDOs Of Sovereigns Or Local And Regional Governments, May 3, 2006
-- Covered Bond Monitor: Technical Note, Feb. 14, 2006
-- Surviving Stress Scenarios: Assessing Asset Quality Of Public Sector Covered Bond Collateral, Sept. 30, 2003
-- Standard & Poor’s Develops Criteria For Rating Obligations Foncieres, May 5, 2000