OREANDA-NEWS. November 03, 2015. Fitch Ratings has affirmed Societe Generale SFH's (SG SFH) EUR21bn Obligations de Financement de l'Habitat (OFH; French legislative covered bonds) at 'AAA'. The Outlook is Stable.

The affirmation follows the addition of Banque Francaise Commerciale de l'Ocean Indien (BFCOI) as collateral provider under the programme, which took effect via a secured loan as per the provisions of article L-211-38 of the French Monetary and Financial Code. This collateral backs advances made by SG SFH to Societe Generale (SG), which then on-lends the proceeds to BFCOI. The new collateral represents 0.3% of the cover pool and did not lead to a new OFH issuance.

KEY RATING DRIVERS
The 'AAA' rating is based on Societe Generale's (SG) Long-term Issuer Default Rating (IDR) of 'A'/Stable, which acts as reference IDR for the programme, an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high risk) and the programme's contractual minimum OC of 8.5%. The Stable Outlook on the OFH reflects that on SG's IDR and for French residential asset performance.

Fitch views the collateral provided by BFCOI as riskier than that provided by SG and Credit du Nord (CDN), with a 'AAA' weighted average foreclosure frequency of 52.9% for the BFCOI cover pool, compared with 16.6% for the combined SG and CDN pools. This reflects the higher weighted-average original loan-to-value ratio of the BFCOI loans of 91%, compared with 80% for SG loans and 84% for CDN loans, and the significantly worse historical default performance for the bank's respective loan book. However, given the limited weight of BFCOI in the total SG SFH cover pool (0.3%), the overall 'AAA' expected loss derived for the combined cover pool remains largely unchanged, at 5.40% compared with 5.35% previously. The agency is comfortable that the riskier credit profile of the BFCOI loans will not affect the overall credit quality of the programme's cover pool, as the exposure is contractually limited to EUR210m and will remain at or below 1% over the next two years.

The 'AAA' breakeven OC for the OFH remains unchanged at 5.0%. It is driven by the credit loss component, which remains unchanged at 5.7%, reflecting an almost unchanged 'AAA' expected loss. The negative cash flow valuation component (-0.9%) reflects the natural hedge between assets and liabilities, which are mostly fixed-rate, as well as the excess interest present in the programme (weighted average (WA) fixed-rate on the assets of 3.1% vs. a WA fixed-rate on the OFH of 1.3%). This component has increased (from -1.7% previously) due to a slightly lower excess interest (WA fixed rate on the assets of 3.3% previously). The asset disposal loss component of 4.2% (4.6% previously) is driven by the cost of reinvestment of excess cash below Euribor in Fitch's worst-case high prepayment scenario.

The D-Cap of 3 remains driven by the weak link assessment of the liquidity gap and systemic risk component. The addition of BFCOI as collateral providers has not changed the agency's assessment of the programme's D-Cap components.

The unchanged IDR uplift of 2 reflects exemption of covered bonds from bail-in, Fitch's view that France is a covered bond intensive jurisdiction and the fact that Fitch considers that resolution by other means than liquidation is more likely for SG.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to a downgrade if either of the following occurs: (i) Societe Generale's Issuer Default Rating (IDR) is downgraded by three notches to 'BBB' or below; or (ii) the total number of notches represented by the IDR uplift and the DiscontinuityCap is reduced to two or lower.