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French RMBS changes game for guarantees
May 9, 2014 / 7:02 PM / in 4 years

French RMBS changes game for guarantees

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 quality label.

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 Dutch space.

“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 said. RULE UNCERTAINTY 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 next week.

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.


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 loans.

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 added. (Reporting by Anna Brunetti, editing by Anil Mayre)

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