(The following statement was released by the rating agency)
Dec 24 - Fitch Ratings has maintained CIF Euromortgage (CIF Euro) EUR25.7bn obligations foncieres’ (OF) ‘AAA’ rating on Rating Watch Negative (RWN).
The rating action is based on the issuer’s intention to post and maintain a minimum nominal overcollateralisation (OC) of 8.3% between the cover pool and outstanding OF, which will be publicly acknowledged in January 2013, and effective end January 2013. This percentage is equal to the updated ‘AAA’ breakeven OC calculated by Fitch, whereas the current nominal OC level stands at 6.4%. Resolution of the RWN is pending the implementation of this commitment. Fitch’s updated breakeven OC for the rating rests on the assumption that the French state guarantee applicable to certain exposures towards Caisse Centrale de Credit Immobilier de France (3CIF, ‘A’/Stable) will be approved by the European Commission.
Based on an unchanged Fitch Discontinuity Cap (D-Cap) of 3 (moderate high), the rating of CIF Euro’s OF remains ‘AA’ on a probability of default basis and ‘AAA’ factoring in recoveries given default. The OF’s rating also stays credit-linked to the ‘AAAsf’/Stable rating of the Class A units issued by CIF Assets 2001-1, which represent 73% of CIF Euro’s cover pool and is backed by a pool of French residential loans originated by 3CIF group.
Given that the group stopped originating new loans in September 2012, Fitch considers the OF programme to be in run-off mode. Consequently the agency relies in its analysis on a public statement regarding the maintenance of OC (or in its absence, on the minimum regulatory level), rather than on the lowest level of OC observed over the last 12 months. The ‘AAA’ breakeven OC has increased compared to Fitch’s previously calculated level of 6.4%. This is due to the revised higher refinancing cost assumptions for some cover pool assets, and despite the lower credit risk attributed to other assets under the state guarantee. The Fitch ‘AAA’ breakeven OC for the OF rating will be affected, among others, by the profile of the cover assets relative to outstanding OF, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.
As of 31 October 2012, CIF Euro’s cover pool totalled EUR27.3bn. In a ‘AAA’ scenario, Fitch has modelled stressed default and recoveries on the external RMBS as well as on the pool of French residential loans granted by 3CIF group and securing the mortgage promissory notes. The external RMBS and the mortgage promissory notes make up 2.8% and 10% of CIF Euro’s assets, hence the cover pool credit risk only has a limited impact on the breakeven OC for the OF’s rating.
Maturity mismatches are the largest driver of Fitch ‘AAA’ breakeven OC for CIF Euro’s OF. In a stress scenario where the security on the mortgage promissory notes is enforced, the weighted average residual maturity of CIF Euro’s assets lengthens to 8.25 years compared with 4.75 years for the OF. Fitch has modelled that the resulting mismatches could be bridged through repos of CIF Assets 2001-1 units, or sale of the residential loans securing the promissory notes. Fitch has applied stressed refinancing cost assumptions of c. 250bps p.a. above the stressed interest rate for the residential loans, and harsher assumptions for the RMBS.
In terms of sensitivity, the OF rating would be vulnerable to downgrade if any of the following occurred: (i) the Issuer Default Rating (IDR) of Credit Immobilier de France Developpement (CIFD), CIF Euromortgage’s parent, was downgraded by one notch to ‘A-’ or lower; (ii) the D-Cap fell by one or more categories to 2 (high risk) or lower; (iii) the OC dropped below Fitch’s ‘AAA’ breakeven level of 8.3%; or (iv) Class A units issued by CIF Assets 2001-1 were downgraded below ‘AAAsf’.