OREANDA-NEWS. March 25, 2016. Fitch Ratings has affirmed Caisse de Refinancement de l'Habitat's (CRH) outstanding EUR39.48bn and CHF2.15bn bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The 'AAA' rating of the bonds is based on Fitch's credit view of the programme's main debtor of recourse, CRH, an unchanged Discontinuity-Cap (D-Cap) assessment of three notches (moderate high) and the specific level of overcollateralisation (OC) that CRH requires from each of its shareholders, which are sufficient to support a 'AA' rating on a probability of default (PD) basis and recoveries above 91% on an aggregate basis in a 'AAA' scenario.

Fitch's analysis takes into account the absence of cross-collateralisation between the cover pools pledged as collateral for the promissory notes issued by the various shareholder banks. The agency therefore tests whether the specific level of OC it relies upon in its analysis supports a 'AA' rating on a PD basis for each of the shareholders, on an individual basis. In a 'AAA' scenario, Fitch calculates recoveries on CRH's bonds from the proceeds of all underlying cover pools, assuming a worst case scenario whereby all the shareholder banks would have defaulted on their promissory notes.

Fitch's 'AA' breakeven OC for the bonds on a PD basis is calculated for each shareholder bank's exposures. The weighted average (WA) breakeven OC is 34%, with a highest individual value of 50%, and compares with a WA relied-upon OC of 42.8% on the underlying promissory notes of all the shareholder banks.

The increase in the WA breakeven OC to 34% from 25% previously is driven by a general increase in the gap between the WA life of the pledged assets and of the promissory notes in Fitch's stressed analysis, to 3.2 years from 2.3 years previously (on a WA basis across all shareholder banks). This resulted in increases in the cash flow valuation component of Fitch's analysis.

The increase in the WA breakeven OC is further driven by a general worsening of the credit loss component of the agency's analysis (to WA 13.7% from 10.9% previously in a 'AAA' scenario), reflecting in particular Fitch's updated treatment of foreign currency stresses of loans denominated in Swiss-francs (4.8%) and backed by properties located in France and whose recovery proceeds would be in euro.

The Stable Outlook on the bonds reflects that on the majority of the shareholder banks and on the underlying French residential loans performance.

Fitch's three-notch D-Cap assessment (moderate high) is driven by the agency's assessment of the liquidity gap and systemic risk component and cover pool-specific alternative management component of the analysis. The assessment of the liquidity gap and systemic risk component reflects, in particular, the joint and several commitment of the underlying shareholder banks to provide a liquidity line of up to 5% of CRH's outstanding bonds.

The agency does not assign any IDR uplift to CRH as it does not expect that CRH would be resolved by other means than liquidation, the importance of covered bonds as funding instruments in France has already been factored into the liquidity gap and systemic risk D-Cap assessment and CRH has no outstanding senior unsecured debt.

RATING SENSITIVITIES
The 'AAA' rating of the bonds would be vulnerable to a downgrade if any of the following occurs: (i) the overcollateralisation (OC) that Fitch relies upon in its analysis drops below the breakeven OC for a 'AA' tested rating on a probability of default (PD) basis for any shareholder bank, or (ii) the OC that Fitch gives credit to at an aggregate level falls below the breakeven OC for at least 91% recoveries in a 'AAA' scenario, or (iii) Fitch's view of CRH's creditworthiness is lowered by one notch or more, or (iv) Fitch's Discontinuity-Cap assessment of three notches (moderate high) is lowered by one notch or more.