OREANDA-NEWS. Fitch Ratings has affirmed Compagnie de Financement Foncier's (CoFF) Obligations Foncieres (OF; French legislative covered bonds) at 'AA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects Credit Foncier de France's (CFF) Long-Term Issuer Default Rating (IDR) of 'A', which acts as the reference IDR for this programme; an unchanged IDR uplift of two notches; a Discontinuity Cap (D-Cap) revised to 3 notches (moderate high) from 4 notches (moderate); and the lowest overcollateralisation (OC) observed over the last 12 months, which is higher than the unchanged breakeven OC of 11% for the OF rating. The Stable Outlook on the OF reflects the Stable Outlook on CFF and the French sovereign, as well as Fitch's view on the underlying French residential loan assets.

The 'AA' rating of the OF is based on CFF's IDR adjusted by the IDR uplift of 'AA-' and a one-notch recovery uplift. The unchanged 'AA' breakeven OC of 11% is mainly driven by the credit loss component, which increased to 13.9% from 10.5% previously, and an improved cash-flow valuation component, driven by better interest and maturity matching. The increase in credit loss reflects a higher expected loss on the overall cover pool in a 'AA' rating scenario, stemming from a higher default expectation derived on the underlying public sector cover assets analysis (in part resulting from a higher exposure to Italian public sector exposures) and lower recovery expectation derived on the French residential loan cover assets.

In its analysis, Fitch took a more conservative approach than previously when modelling the FGAS state guarantee mechanism that secures some of the French residential loans in the cover pool. This is because the ongoing benefit of the FGAS guarantee mechanism for CoFF is linked to CFF's own continued financial participation under the mechanism. The allocation of funds to the issuer and the ongoing payments by the state under the mechanism following a default of CFF are not clearly defined. As such, the agency did not give credit to the FGAS state guarantee mechanism in rating scenarios above the rating of CFF (A/Stable) when calculating recoveries on the French residential loans benefiting from such guarantee.

The cash flow valuation component of 1.9% decreased from 4.3% previously. The drop in the cash flow valuation is driven by the overall post swap position of the assets and liabilities, with a slightly higher proportion of post-swap fixed-rate liabilities than assets. This reflects the changes in the composition of the overall cover pool and the issuer's continued deleveraging of swap positions to rely more heavily on the natural hedging between the assets and liabilities. It also reflects the excess spread generated for the programme.

Fitch has revised CoFF's Discontinuity-Cap (D-Cap) assessment to 3 notches (moderate high risk) from 4 notches (moderate), reflecting its updated assessment of the weakest link Liquidity Gap and Systemic Risk component. The change is driven by the smaller proportion of highly rated public-sector bonds and a reassessment of the liquidity risk that could stem from termination payments due on derivative contracts whose replacement language is not fully in line with Fitch's applicable criteria.

In its analysis, Fitch relies on the lowest level of overcollateralisation observed over the last 12 months. In calculating the OC level relied upon, the agency does not give credit to the cash obtained from short-term repo operations with the banking group, as the assets pledged as collateral for such repo operations are included in the calculation. Fitch has adopted a cash flow-based approach when calculating the relied upon OC, rather than the previously applied accounting based approach. As such, the OC which Fitch takes into account in its analysis is 15.6% (which is less than that calculated under French regulatory rules).

RATING SENSITIVITIES
The Obligations Foncieres' 'AA' rating would be vulnerable to a downgrade if any of the following occurs: (i) Credit Foncier de France's (CFF) Long-Term Issuer Default Rating (IDR), acting as CoFF's reference IDR, is downgraded by five notches to 'BB+' or lower; (ii) the number of notches represented by the Discontinuity-Cap (D-Cap) and the IDR uplift is reduced to zero; (iii) the overcollateralisation (OC) that Fitch gives credit to in its analysis falls below Fitch's 'AA' breakeven OC of 11%; (iv) France is downgraded below 'AA'.