Fitch Affirms CM-CIC Home Loan SFH's Covered Bonds at 'AAA'; Outlook Stable
The affirmation follows amendments to the programme's documentation. Following such amendments, all interest rate swaps have been terminated with the exception of one, which represents 0.7% of outstanding bonds. All non-euro denominated OFH (5.5% of outstanding bonds) remain hedged by cross-currency swaps. The vast majority of both assets and liabilities are now fixed-rate.
KEY RATING DRIVERS
The 'AAA' rating is based on Banque Federative du Credit Mutuel's (BFCM) Long-term Issuer Default Rating (IDR) of 'A+', the holding company of CM11-CIC, which acts as reference IDR for this programme, an unchanged IDR uplift of 2 notches, an unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high discontinuity risk) and on the programme's 74.9% asset percentage (AP) used for the purpose of the asset cover test (ACT). The Stable Outlook on the OFH reflects that on BFCM's IDR and on the French residential asset performance.
Fitch's 'AAA' breakeven AP has decreased to 85.0% from 94.0% following the removal of swaps and of the negative carry reserve (item Z of the asset cover test). The 85.0% 'AAA' breakeven AP is equivalent to a 17.6% breakeven overcollateralisation (OC). It considers a two-notch recovery uplift above a 'AA' tested rating on a probability of default basis defined as BFCM's IDR adjusted by the IDR uplift. Timely payment is assumed at a 'AA' rating level irrespective of the actual level of OC protection available.
The 'AAA' breakeven OC is driven by the credit loss and cash-flow valuation components. The cash-flow valuation component has increased to 10.7% from -1.2% following the removal of swaps, reflecting the impact of the longer weighted average life of assets (eight years) compared with liabilities (five years) on discounted cash flows in a high interest rate environment. The credit loss component is unchanged at 11.2%.
The unchanged D-Cap of 3 notches remains driven by what Fitch assesses to be the weak link in the liquidity gap and systemic risk component. Fitch has revised the assessment of the privileged derivatives risk component to low from moderate to reflect the reduced materiality of derivatives within the programme.
The unchanged IDR uplift of 2 notches reflects exemption of covered bonds from bail-in, Fitch's view that France is a covered bonds-intensive jurisdiction, the high likelihood of resolution by other means than liquidation for CM11-CIC given its size in the French banking sector and the protection provided by senior unsecured debt in excess of 5% of total adjusted assets.
RATING SENSITIVITIES
CM-CIC HL SFH's rating is vulnerable to a downgrade if any of the following occurs: (i) BFCM's IDR is downgraded to 'BBB' or below; (ii) the sum of the notches represented by the IDR uplift and the D-Cap falls to one or below; (iii) the AP Fitch relies upon increases above the 'AAA' breakeven level of 85.0%.
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