French Covered Bond Handbook 2nd edition - Danske Analyse ...

Investment Research 

September 2009 

French Covered Bond Handbook 

The covered bond handbook of specialist banks in the form 

of Société Crédit Foncière and universal banks in France 

www.danskeresearch.com


10 September 2009 

French Covered Bond 

Handbook 

2nd edition 

Welcome to the second edition of the French Covered Bond Handbook from the Fixed 

Income Research team at Danske Markets. 

This publication is intended as a reference guide to the French covered bond market, 

providing an overview of both issuers of legal and common-law based covered bonds. 

The publication gives a thorough description of the legislative and contractual framework 

in France and it gauges the temperature of the housing market as well as particular 

features of the French housing market compared with European peers. For the 

descriptions of the French economic environment, and in particular the housing market, 

we would like to thank our colleague Frank Øland Hansen, Senior Analyst. 

The table below lists the issuers included in this edition. As of today, HSBC France has 

announced its common-law based covered bond programmes, but has not issued yet. 

However, they are included as the bank is expected to do so within the foreseeable future. 

Due to the merger between Group Banque Populaire and Group Caisse d’Epargne only 

one joint issuer profile is included in the edition. 

Table 1. Issuers included in this edition 

Legal based issuers 

BNP Paribas SCF 

CFF 

CIF Euromortgage 

CRH 

Dexia Municipal Agency 

General Electric SCF 

Societe Generale SCF 

Common-law based issuers 

Banques Populaires 

BNP Paribas 

Caisse dEpargne 

CM-CIC 

Credit Agricole 

HSCB France 

Source: Danske Markets 

The legal based covered bonds (Obligations Foncière) are issued by subsidiaries (Société 

de Crédit Foncière) of larger universal banks as the specialist banking principle prevails 

in France. The banking groups of which these Société de Crédit Foncière are members are 

only covered briefly in this covered bond handbook. 

The common-law based covered bonds are issued out of the balance sheet of universal 

banks while using a SPV approach. Because of this approach the parent banks are 

described in more detail. 

Finally, CRH – which is a joint funding company owned by a number of large French 

retail banks – is described in detail in line with the Société de Crédit Foncière issuing 

Obligations Foncière. 

Copenhagen, September 2009 

Chief Analyst 

Stig Tørnes, CFA 

+45 45 12 80 43 

sttr@danskebank.dk 

Senior Analyst 

Christian Riemann-Andersen 

+45 45 12 85 65 

chande@danskebank.dk 

Analyst 

Kristian Myrup Pedersen 

+45 45 12 85 19 

kripe@danskebank.dk 



Contents 

French Covered Bond Handbook .................................................................................... 1 

Introduction ................................................................................................................................................................ 5 

Market maturity and size ................................................................................................................................... 6 

State intervention in the French banking industry ............................................................................. 6 

Overview of issuers in the French market .............................................................................................. 8 

The Obligation Foncieres (ObF) legal framework .............................................................................. 11 

Common-law based programme ................................................................................................................ 12 

Legal framework governing CRH operations ...................................................................................... 18 

The French economy and housing market ........................................................................................... 19 

French market for housing loans ............................................................................................................... 21 

French guarantors .............................................................................................................................................. 21 

Conclusion ............................................................................................................................................................... 23 

Banque Populaires & Caisse d'Epargne ............................................................ 25 

Company profile .................................................................................................................................................... 25 

Financial performance...................................................................................................................................... 25 

Business model and funding profile ......................................................................................................... 26 

Cover pool and asset quality ......................................................................................................................... 26 

BNP Home Loans CB .............................................................................................................. 27 





BNP Public Sector SCF ......................................................................................................... 29 





CFF .............................................................................................................................................................. 31 





CIF Euromortgage ....................................................................................................................... 33 





CM-CIC .................................................................................................................................................... 35 





Credit Agricole ............................................................................................................................... 37 





2 | 10 September 2009 



CRH ............................................................................................................................................................ 39 





Dexia Municipal Agency ...................................................................................................... 41 





General Electric SCF ................................................................................................................ 43 





HSBC France ................................................................................................................................... 45 





Societe Generale SCF............................................................................................................. 47 





Cover bond frameworks ...................................................................................................... 49 







Introduction 

France is currently one of the largest providers of euro benchmark covered bonds. In 

2008 the euro benchmark supply issued out of France reached EUR25bn down from 

record high EUR43bn in 2007. Year to date in 2009 the total French covered bond 

issuance (tap issuance included) has reached close to EUR30bn including no less than 

three inaugural issuances from Credit Agricole, BNP SCF and General Electric SCF. This 

makes France the largest issuer of public listed covered bonds in 2009. 

Just a few years ago this was certainly not on the cards. With annual gross supply of 

EUR8-11bn France might have ranked a decent third after Germany and Spain, but in 

absolute numbers the gap was significant as Germany typically printed EUR45-50bn a 

year and Spain printed a massive EUR65bn in 2006. 

However, at end-2006, BNP Paribas revolutionised the market with the launch of a 

common-law based covered bond programme that would coexist with the already 

established traditional law based Obligation Foncières (ObF). One of the main reasons for 

the introduction is found in the composition of the French housing loan market. When 

three loans were granted two of them would be guaranteed loans and one a traditional 

mortgage loan. 

There are several explanations (see below), but the main challenge with this composition 

was that the ObF legal framework at the time of the introduction of BNP’s covered bond 

programme only allowed for 20% guaranteed loans (today 35% is allowed) in a covered 

pool. Thus BNP had a large balance of loans not qualified for covered bond funding. This 

was solved with the covered bond programme where no restrictions on guaranteed loans 

were applied. 

A short glance at the balance sheets of other major French banking groups revealed that 

BNP was far from the only bank that experienced a similar mismatch between cover 

assets available and the legal framework of ObF. Thus, it came as no surprise that CM- 

CIC, Banque Populaires, Group Caisse d’Epargne, Credit Agricole and HSCB France 

joined BNP. All major French banks are issuing common-law based covered bonds, with 

SocGen the exception that proves the rule. 

To some surprise, in 2008, Societe Generale (SocGen) launched an ObF programme 

joining the three existing issuers Dexma, CIF Euromortgage and CFF. As SocGen also 

intended to fund public loans there was a logical explanation for its choice. In 2009, BNP 

Paribas and General Electric followed suit and established SCF-entities to issue ObF and 

this trend once again highlighted the complexity of the French market. A complexity that 

increases if one also takes into account covered bonds issued by special institution Caisse 

de Refinancement de l'Habitat (CRH). 

In this light we hope that the French Covered Bond handbook will help to give a better 

understanding of this rapidly evolving market. 

In the following chapters we will give a brief overview of the market in terms of size and 

issuers followed by a recap of the recent performance of covered bonds. Thereafter we 

will go into detail about the different structural setups that the issuers have applied – i.e. 

the ObF legal framework, the special law regulating CRH and finally the common-law 

based programmes. Then we take the temperature of the housing market and the French 

economy in general before we give a short explanation of the French market for housing 

loans including a description of the major housing loan guarantors. Finally, we present 

issuer profiles for all current issuers and one potential issuer (HSBC France). 




Market maturity and size 

Although the first issuer of ObF dates back to 1852 (Credit Foncier de France, CFF), in 

line with other mature markets such as Denmark and Germany, the benchmark market is 

fairly new, originating in 1999 with the launch of the ObF framework in the form (with 

modifications) that we know today. 

The annual issuance of euro benchmark ObF ranged between EUR5bn and EUR10bn in 

the first years and hit a high in 2003. Thereafter issuance decreased to EUR8bn in 2005. 

In 2006, the same year as the common-law based programmes were launched, issuance 

picked up in pace again and reached EUR17.5bn. Record supply was reached in 2007 

with EUR27bn. In 2008 and 2009, three new ObF issuers have been established, Société 

Générale SCF, BNP Paribas SCF and General Electric SCF, which will enlarge the 

issuance of ObF. 

Alongside the three deeply-rooted ObF issuers and the three newcomers, specialist 

institute CRH formed in 1985 operates according to a specific law. In recent years CRH 

contributed with a yearly issuance of EUR1.5-3bn up until 2005. In 2006 and 2007, 

supply rose significantly as the members of CRH increasingly relied on the specialist 

institution as a refinancing vehicle and supply reached about EUR8bn in 2006 and 2007. 

In 2008, CRH issuance was down to EUR4.4bn. due to the difficulties in the covered 

bond market. 

The third leg of the French covered bond market was launched in December 2006 with 

the first common-law covered bond issuance from BNP Paribas and shortly afterwards, 

other banks followed suit. Total issuance reached EUR9bn in 2008, equal to the level 

year-to-date in 2009. 

In total the annual issuance in 2007 reached EUR43bn and made France the largest issuer 

in Europe. Despite market turmoil this was repeated in 2008 with a total issuance of 

French covered bonds of more than EUR24bn, equivalent to almost a quarter of all 

issuance which made France the largest country in these terms ahead of Germany. 

Measured on the total amount of euro benchmark outstanding France, however, still lags 

former leaders Spain and Germany. France ranks third with 13% of total outstanding 

amounts of euro benchmark after Germany (36%) and Spain (30%). 

With respect to maturity profile, the French credit curve is in general very well spread 

across maturities with the majority between one and 10 years. However, longer maturities 

are also issued and in 2006, CFF issued a 50-year euro benchmark. 

With respect to currencies the euro is of course predominant but in 2002, the first 

issuance in US dollars took place. These peaked in 2007 with more than USD7bn and 

with a total of USD20bn dollar-denominated ObF outstanding the US dollar is today the 

second most important currency, followed by the Swiss franc and sterling. 

State intervention in the French banking industry 

The French government has been very successful in supporting the French banking 

industry by providing the cheapest government guaranteed funding in the euro market. 

The French authorities decided against a direct guarantee scheme and instead make use of 

a structure set-up for this purpose (Société de refinancement des activités des 

établissements de crédit (SFEF)), which is the only French institution enjoying a state 

guarantee. SFEF issues securities guaranteed by the State with a view to making loans to 

credit institutions against collateral. The credit institutions pay a premium over and above 

the normal market price and will have to make commitments regarding their conduct. 

SFEF's activities are limited to five years. Under the law, the guarantee that the French 

Government can provide to SFEF for this purpose may not exceed EUR265bn. 




As of today, SFEF has issued EUR148bn (equivalent) equal to 56% of the maximum 

amount. No information is available on how the amount has been split between the 

beneficiary banks. Due to the non-existing timely payment risk in the event of bank 

default and the high degree of liquidity compared to other single name government 

guarantee issuances, SFEF has been printing guaranteed bonds at the tightest spreads in 

Europe. 

Chart 1. ASW spreads on euro government guaranteed bonds 

60 

50 

UK FR SE PT NL DE DK SP 

CurrentASW spreads, EUR, mid, bp 

40 

30 

20 

10 

0 

-10 

-20 

-30 

-40 

19-Oct-08 22-Nov-08 26-Dec-08 29-Jan-09 4-Mar-09 7-Apr-09 11-May-09 

Issuance date 


Besides the establishment of SFEF with the purpose of providing funding to the domestic 

banks the French government has established a state owned company (Société de prise de 

participation de l'État (SPPE)) to invest in securities issued by French banks. These 

securities can take the form of hybrid capital instruments (subordinated debt securities 

classified as non-core Tier 1 capital) as well as preferred shares. The securities will be 

remunerated at a fixed rate for the first five years and at a variable rate thereafter. The 

remuneration, which will average about 8%, will reflect the degree of solvency of each 

beneficiary bank via a credit default swap (CDS) component, whereby remuneration is 

modulated according to the risk of default. Under the scheme, the intervention of the 

French authorities is capped at EUR21bn. Especially, Group Caisse d’Epargne and Group 

Banque Populaire (EUR7bn) as well as Dexia (EUR3bn) have taken a large share of the 

capital injection from the French government. 

The French government participated in a concerted intervention with the Belgian and 

Luxembourg government to support Dexia. The French state and the state-controlled 

financial services company Caisse des Dépôts et Consignations subscribed to EUR3bn 

out of the total EUR6.4bn equity capital injection. Further, the French, Belgian and 

Luxembourg governments jointly committed, from 9 October 2008 to 31 October 2009, 

to guarantee new deposits and interbank and institutional financing, as well as new bond 

issues for institutional investors (maximum of EUR150bn), with a maturity up to three 

years, issued by Dexia SA and a number of subsidiaries hereof. 




Table 2. Moody's outlook for French banks remains negative (July 2009) 

"The French banking business model, which is based on universal banking, has provided the 

large banking groups with a buffer against the worst effects of the financial crisis. Nonetheless, 

French banks have not been immune to the global crisis and the business model will need to be 

adapted as additional adverse developments on the financial markets are still likely (although 

these would probably be of a less severe nature than those seen in 2008) and, more 

fundamentally , as the macro-environment is deteriorating and brings with it a negative credit 

cycle, says Stéphane Le Priol, Moody's lead analyst for the French banking system. 

In the medium term, Moody's expects French banks to be affected by a reduction in their activity 

and hence in revenues. Coupled with an increase in the costs of risks, this is likely to lead to 

further pressure on profitability. "We anticipate more structural changes to the French banking 

system to take place in the coming years", adds Mr Le Priol. However, the changes are likely to 

be on a lesser scale than the two major examples to date: BNP Paribas's takeover of Fortis Bank 

and the merger between two mutualists, GCE and GBP, forming a new national champion, better 

capable of supporting ailing Natixis. In Moody's view, we are more likely to witness additional 

integration of "factories" and specialised entities, either within the groups or between groups, as 

evidenced by the recently announced merger of SG's and Credit Agricole's asset management 

subsidiaries. 

Source: Moody's 

Overview of issuers in the French market 

Currently there are 12 issuers of covered bonds in various forms in France and as 

mentioned the 13 th , HSBC France, is lined up for inaugural issuance. An overview of the 

different issuers, including an overview of ratings, rating scores and recent rating actions, 

is given below: 

Table 3. Legal based issuers 

DEXMA CFF CIFEUR BNPP SCF SG SCF GE SCF CRH 

Collateral Public Public 

Mortgage Public Public 

Mortgage Mortgage 

Mortgage 

Mortgage 

Geography International International International France International France 

France 

France 

Committed O/C 5% 8% 2% 5% 5% 

5% 25% 

7.5% 

Cover pool size EUR71bn EUR96bn EUR17bn EUR1.5 EUR5.5bn EUR1.4bn EUR51bn 

Current LTV - 53% 62% - - 74% 55% 

Seasoning (months) - - 48 - - 48 - 

NPL 0% 0% 0.5% 0% 0% 0% 0% 


Table 4. Common-law based issuers 

BNPPCB BPCOV CMCIC GCECB ACACB HSBCCB 

Collateral Mortgage Mortgage Mortgage Mortgage Mortgage Mortgage 

Geography International France France France France France 

Committed O/C 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 

Cover pool size EUR23bn EUR19bn EUR20bn EUR29bn EUR6bn - 

Current LTV (indexed) 61% 62% 57% 57% 52% - 

Seasoning (months) 44 39 43 44 50 - 

NPL 0% 0% 0% 0% 0% - 





Table 5. Rating overview 

Issuer 

Issuer (parent) 

rating 

(M/F/S) 

Covered bond 

rating 

(M/F/S) 

Fitch 

D-factor 

Fitch 

supporting O/C 

Moodys 

TPI 

Moodys 

C-score 

ACACB Aa1n/AA-n/AA- Aaae/AAAe/AAAe 22.2% 10.9% - - 

BNPPCB Aa1n/AAn/AAn Aaa/AAA/AAA 20.3% 11.1% Probable - 

BNPP SCF Aa1n/AAn/AAn Aaa/AAA/AAA 11.8% 6.4% 

BPCOV Aa3/A+/ A+ Aaa/-/AAA - - Probable 5.5% 

CFF -/A/A+ Aaa/AAA/AAA - - - - 

CIFEUR A1n/An/A+n Aaa/AAA/- 9.8% - - - 

CMCICB Aa3/A+/AA- Aaa/AAA/AAA 19.8% 12.7% Probable - 

CRH -/-/- Aaa/-/AAA 37.9% - - - 

DEXMA A1n/A/A+ Aaa/AAA/AAA 13.2% - - - 

GCECB Aa3/A+/A+ Aaa/-/AAA - - Probable 5.4% 

GE SCF Aa2/AA+/- Aaa/AAA/- - - 

HSBCCB Aa3/AA/AA Aaae/AAAe/AAAe - - - - 

SG SCF Aa2/AA-/AA- Aaa/AAA/AAA 16.1% 7.0% - 4.5% 





Table 6. Recent rating actions towards French banks 

Date 

Comment 

29-09-2008 S&P downgrades ratings on Dexia Group's core entities 'AA-' from 'AA'; outlook remains negative. 

30-09-2008 Fitch downgrades the long-term ratings of Dexia and its three core operating subsidiaries incl. Dexia Credit Local, to 'AA-' from 'AA+'. At same time, the 

outlooks were revised to Stable from Negative. 

01-10-2008 Moody's downgrades the BFSR of Dexia Credit Local to C- (review for possible downgrade), long term rating downgraded to Aa3 from Aa1. Action 

reflects potential asset write-downs in relation to current capital levels and significant liquidity gap. 

06-10-2008 S&P changes BNP Paribas outlook to negative after Fortis acquisition, 'AA+/A-1+' ratings affirmed. 

07-10-2008 S&P revises outlook on BFBP, CNCE, Natixis to negative on weakening profitability; 'AA-/A-1+' affirmed. 

07-10-2008 S&P downgrades Dexia entities lowered to 'A+/A-1' from AA-/A-1+' on weakening financial and business profiles, on watch for future development. 

08-10-2008 Moody's places on review for possible downgrade the Aaa rating assigned to the covered bonds issued by Dexia Municipal Agency. Action reflects the 

downgrade and further review of the long-term rating of Dexia Credit Local. 

20-10-2008 Moody's changes the outlook on CNCE's C+ BFSR to negative from stable. The long-term debt and deposit ratings were affirmed at Aa3, with a stable 

outlook. Action reflects loss in prop trading as well as general pressure on profitability. 

21-10-2008 S&P downgrades long- and short-term ratings to 'A+/A-1' from 'AA-/A-1+' on BFCM and Caisse Centrale du Crédit Mutuel (CCCM) and Compagnie 

Financière du Crédit Mutuel (CFCM), all of the outlooks are stable. 

27-10-2008 S&P downgrades Natixis to A+/A-1 on lower earnings prospects, outlook stable. 

27-10-2008 S&P downgrades BFBP ratings to 'A+/A-1' from 'AA-/A-1+' on weakened financial flexibility, outlook stable. 

27-10-2008 S&P downgrades Crédit Foncier de Franceto 'A+/A-1' from 'AA-/A-1+' on CNCE downgrade, still on CreditWatch Negative. 

17-12-2008 S&P puts BNP Paribas 'AA+' rating on CreditWatch Negative on concerns over earnings resilience. 

17-12-2008 S&P downgrades Crédit Foncier de France to A from 'A+', outlook stable. 

19-12-2008 S&P downgrades Dexia entities to 'A' from 'A+' on public finance funding pressure, outlook stable. 

19-12-2008 S&P revises outlook on HSBC Holdings PLC and core subsidiaries (incl HSBC France) to negative, ratings affirmed. 

22-12-2008 Moody's downgrades Natixis' BFSR to D+ from C 

16-01-2009 BNP Paribas put on negative outlook by Moody's due to pressure on profitability 

16-01-2009 Fitch revises HSBC Holdings (Incl.HSBC France) outlook to negative, affirms 'AA' rating. 

28-01-2009 S&P downgrades long-term rating on BNP Paribas to 'AA' from 'AA+', outlook is negative. The rating action reflects the material negative impact on 

BNP Paribas' financial profile of the current market dislocation and rapidly deteriorating global economic cycle. 

02-02-2009 Moody's affirms Aa3 long-term of CFF, but downgrades the BFSR of CFF to D+, outlook on all of CFF's ratings is stable. Action reflect large exposure to 

commercial real estate and a larger securities portfolio. 

03-02-2009 Fitch changes BNP Paribas's (BNPP) Outlook to Negative from Stable and downgrades its Individual rating to 'B' from 'A/B'. Other ratings are affirmed. 

Action reflects continued pressure on profitability in the bank's corporate and investment banking division. 

03-02-2009 Fitch places Groupe Caisse d'Epargne (GCE), Groupe Banque Populaire (GBP) and Natixis's Long-term Issuer Default Ratings (IDRs) of 'A+' respectively 

on Rating Watch Negative (RWN). Fitch also downgrades the Individual Ratings of GCE and GBP to 'C/D' from 'C' and downgrades Natixis's Individual 

Rating to 'E' from 'D'. Furthermore, the long-term rating on the central bodies, CNCE and BFBP is placed on RWN. 

20-02-2009 Moody's changes the outlook to negative from stable on the C BFSR and the A1 long-term ratings of 3CIF. Action reflects the concern that 3CIF's 

profitability as well as its wholesale reliant-funding profile will be challenged. 

06-03-2009 Moody's downgrades the BFSR of CNCE from C+ to C with a negative outlook. The BFSR of BFBP was affirmed at C+, but its outlook was changed to 

negative. Natixis' BFSR of D+ was also affirmed and its outlook changed to negative. Long-term and short-term ratings of CNCE, BFBP and Natixis were 

affirmed at Aa3 with a stable outlook. 

09-03-2009 Moody's downgrades HSBC France's BFSR to C from C+ but affirms senior unsecured ratings at Aa3. Downgrade due to pressure on profitability 

09-03-2009 Moody's downgrades HSBC France's BFSR to C, affirms Aa3 with negative outlook. 

01-04-2009 S&P downgrades Caisse Centrale du Crédit Immobilier de France to 'A' from 'A+' on weakened credit risk and profitability, outlook negative. 

09-04-2009 Fitch revises the Support Rating Floors assigned to Credit Agricole, BNP Paribas, Societe Generale), Groupe Caisse d'Epargne and Groupe Banque 

Populaire to 'A+' from 'A-' (A minus). Fitch simultaneously removes the Rating Watch Negative (RWN) on GCE's, CNCE's, GBP's and BFBP's long-term 

ratings of 'A+'. 

09-04-2009 Fitch downgrades long-term rating of Dexia Credit Local 'A+' from 'AA-', outlook stable. 

14-04-2009 Moody's lowers Societe Generale's BFSR to C+, affirms Aa2 rating. Review of the bank's risk profile prompted by the deteriorating macroeconomic 

environment in main markets. 

07-05-2009 S&P downgrades Société Générale to 'A+/A-1' from 'AA-/A-1+' on concerns about earnings resilience, outlook revised to stable from negative. 

11-05-2009 Fitch downgrades Societe Generale (incl. SG SCF) to 'A+' from 'AA-', stable outlook. Action reflects continued pressure on profitability, further 

securities writedowns and mounting asset quality pressure in the loan portfolios, particularly in Central and Eastern Europe and Russia. 

25-06-2009 S&P revises Credit Agricole Outlook to negative on concerns about recession impact on profitability, ratings affirmed at 'AA-/A-1+'. 

06-07-2009 Moody's reiterates negative outlook for French banking sector. 

31-07-2009 Fitch assigns Groupe BPCE ratings of long-term 'A+', Short-term IDR 'F1+', Individual 'C/D', Support '1' and Support Rating Floor 'A+'. The Outlook is 

Stable. Fitch also affirms and withdraws all ratings on Groupe Caisse d'Epargne (GCE) and Groupe Banque Populaire (GBP). 

31-07-2009 S&P assigns 'A+/A-1' ratings to new BPCE, outlook stable. 

Source: Ratings agencies 

10 | 10 September 2009 



The Obligation Foncieres (ObF) legal framework 

ObF is governed by Articles L.515-13 to L.515-33 and R.515-2 to R.515-14 of the French 

Monetary and Financial Code (Code monétaire et financier). Only Sociétés de Crédit 

Foncier (SCF) is entitled to issue Obligations Foncières (ObF). 

Holders of ObF benefit from a privilege (priority right) on all the assets and revenues of 

the SCF and are allowed to operate in a bankruptcy remote environment. 

As a specialist bank a SCF is limited in its possible operations. A SCF may grant or 

acquire either secured loans or exposures to public entities or other eligible securities and 

issue ObF (or incur other forms of borrowings) to finance these assets. However, a SCF is 

also allowed to issue ordinary bonds or raise funds that do not benefit from the priority 

right. A SCF may not make any other investments except of substitute assets within a 

limit of 15% of the cover pool. 

Eligible assets for ObF issuance comprise: 

• Secured mortgage and commercial loans. 

• Exposures to public entities such as state, central banks, local authorities or stateowned 

entities. 

• Senior tranches of mortgage-backed securities issued by Fonds Commun de Créances 

(French securitisation vehicles). 

• Promissory note. 

Secured loans include first-ranking mortgages (or other real estate security interests that 

are equivalent to a first-ranking mortgage) or loans that are guaranteed by a credit 

institution or an insurance company (but no in-house guarantees). The property must be 

located in France or in the EU/EEA (European economic area) or in a state benefiting 

from the best credit level rating. LTV is capped at 60% if both commercial loans and 

mortgage loans are used as collateral – if only mortgages are applied LTV can be raised 

to 80%. It is also possible to go beyond 60% if the portion up to 80% is financed by 

ordinary bonds with no priority right. Finally, LTV of 100% is possible if a guarantee 

from the social security fund (FGAS) is applied. 

Exposure to public entities such as state, central banks, local authorities or state-owned 

entities located within the EEA, in a Member State of the EC or in a State benefiting from 

the best credit rating given by a rating agency. 

Senior tranches of mortgage-backed-securities (MBS) issued by Fonds Commun de 

Créances (FCCs) or other similar vehicles within EU/EEA. Such assets would comprise 

at least 90% of eligible assets. It is worth noting that the limit of 20% MBS tranches in 

the cover pool stated in CRD is not in effect in France. This regulation is deferred until 

end-2010 and it is to be renegotiated before is becomes effective. 

Promissory notes (Billet Hypothecaire); these are limited to a maximum of 10%. 

In respect of ALM requirements, the law states that the nominal value of the cover pool 

including derivatives must exceed the nominal value of outstanding bonds issued, 

respectively. Furthermore, the SCFs are obliged to have a risk management system in 

place to assess overall interest rate risk and they are obliged to report to the French FSA 

and external auditors on an ongoing basis. Hedging contracts are allowed to hedge market 

risk (interest rate risk, currency risk and liquidity risk) and counterparties to such 

contracts have privileged status. The legal framework does not stipulate any limits on 

liquidity risk. 

No O/C level is required by law. However, any contractual committed O/C will be 

available in case of default. 

11 | 10 September 2009 



The valuation of cover assets must be carried out in a prudent manner and the 

assessment must be done by independent surveyors according to guidelines laid down in 

the law (L.515-30). 

A SCF is under the supervision of a specific controller approved by the French banking 

authorities. Bankruptcy remoteness is ensured by Article L.515-27, which prohibits the 

bankruptcy of the parent bank from being extended to a SCF. In the case of default of the 

SCF there is also no recourse to the parent bank. In other words, the double recourse is 

limited to the SCF (the issuer) and the cover pool. 

In the case of default an insolvency administrator is appointed. The asset segregation is 

secured through the cover register. Regarding bankruptcy proceedings the preferential 

right to eligible assets as well as non-eligible asset is explicitly stipulated. Hence, in case 

of insolvency of the SCF, the bondholders and derivative counter parties have a statutory 

preferential right to assets in the cover pool and outside the cover pool. Note, an issuer 

default does not prompt an acceleration of covered bonds or a determination of derivative 

contracts. 

Common-law based programme 

As with common-law based programmes issued out of UK (before the legal framework 

was implemented) the issuers in France have deliberately endeavoured to apply almost 

identical structures. Thus, there is very little differentiating across issuers and in the 

following we describe the main characteristics of Banque Populaires’ programme, but the 

conclusion is applicable for the other common-law based programmes as well. Only BNP 

Paribas diverges from the other issuers, hence non-domestic loans/mortgages are eligible 

as cover assets in BNP Paribas’ cover pool. 

Eligible assets for common-law based covered bond issuance comprise are secured 

mortgages and loans guaranteed by a number of third-party guarantors. The eligibility 

criteria are: 

• Loan has to be located in France (not in the case of BNP Paribas). 

• Loan amount of less than EUR1m with a LTV-ratio not exceeding 100%, yet only 

80% is taken into account in the asset coverage test. 

• Loan must be denominated in euro or Swiss franc. 

• Loan-term to maturity must be less than 30 years with monthly or quarterly payments. 

• Loan must not be in arrear or default. 

• Borrower does not benefit from a contractual set-up. 

Substitution assets are allowed in the cover pool within a limit of 20%. Such assets must 

be liquid and secure (i.e. time deposits, government bonds and short term (


The obligations of BFBP are secured under the terms of a “Collateral Security” 

agreement. The security is created under French law (Article L 431-7-3) of financial 

collateral agreements (which implements the EU Collateral Directive). This set-up 

ensures that if certain events occur (see list below) prior to an issuer’s insolvency the 

security from cover assets will be enforced and legal title to the cover assets will be 

transferred to the issuer, BPCB. 

An event of default is triggered by one of the following events: 

• Failure to make required payment into the collection loss reserve account. 

• Failure to comply with obligations to service a home loan. 

• Failure to fund the collection loss reserve or the home loan security reserve. 

• Failure to enter a hedging agreement following a hedging trigger event. 

• Breach of asset coverage test. 

• Breach of amortisation test. 

As the structure is based on a true sale there will be no doubt regarding transfer of assets 

in the event of default. We view the use of the EU collateral directive as a very strong 

feature of the French contractual covered bond programmes. 

The issuer will hereafter continue to pay the covered bonds. If the cover assets transferred 

to the issuer from collateral providers (the entities in Banque Populaire cooperative 

banking group) should prove insufficient to meet the covered bond holders’ claims, the 

issuer has a residual unsecured claim against BFBP (i.e. double recourse). In the event of 

an issuer default, the covered bonds will be accelerated. To ensure that funds will be 

available to covered bondholders in case of issuer default, the issuer has pledged all assets 

and accounts in favour of the Issuer Security Agent (BFBP) to benefit covered 

bondholders. 

Table 7. Common-law covered bond structure 

Source: Banque Populaires and Danske Markets 

13 | 10 September 2009 



The issuer is supervised by Banque de France but, as mentioned, not under the scope of 

the regulations applicable to the issuers of ObF. Therefore, the bonds currently carry a 

20% risk weighting (Revised Standard Approach). However, BP’s peer, BNP Paribas, has 

requested Banque de France to make a formal review as to whether the covered bonds can 

benefit from a preferential 10% weighting, as is the case with CRH. We believe the 

decision is subject to a high degree of uncertainty and advise potential investors to act on 

the 20% risk weighting. 

In line with the UK covered bond programmes, the French structures includes an asset 

coverage test (ACT) to be performed on a monthly basis to make sure that the issuer can 

meet its obligation under the covered bond guarantee. Accordingly, the issuer must ensure 

that on each calculation date, the adjusted aggregate loan amount will be in an amount 

equal to or in excess of the aggregate principal amount outstanding of the covered bonds 

then outstanding from time to time. 

If the same has not been remedied on or before the next calculation date, a breach of the 

asset coverage test will constitute an issuer event of default, which will entitle the bond 

trustee to serve an issuer acceleration notice on the issuer and upon the service of such 

notice, the bond trustee shall serve a notice to pay on the issuer under the covered bond 

guarantee. 

14 | 10 September 2009 



Table 8. Definition of adjusted aggregated loan amount in the ACT 

The adjusted aggregate loan amount of the portfolio is defined according to the 

following formula: 

A + B + C + D (Y + Z) 

A corresponds to the lower of; 

(a) The sum for each loan of the lower of; 

(i) The actual outstanding current principal balance of the loan; and 

(ii) 80% of the indexed valuation relating to the relevant loan secured by a mortgage 

or guaranteed by Crédit Logement or another guarantor. Different cut-off 

percentages could apply to other types of loans. This reflects the fact that the portion 

of each loan that is effectively eligible for covered bond funding only extends up to 

80% LTV. This will be determined by using a house price index in relation to 

residential properties in France and 

(b) The aggregate current principal balance of all loans in the portfolio multiplied by 

the asset percentage (92.5%). Multiplication by the asset percentage ensures that, 

regardless of the LTV level of the portfolio, a minimum 7.5% credit enhancement will 

always be available. In both (a) and (b), the outstanding amount of the loan will be 

reduced by any loss caused by a material breach of the servicing procedures. Any 

loan within the portfolio that does not comply with the eligibility criteria will be given 

no credit for the purpose of calculating the ACT. 

B equals the aggregate amount of cash standing to the credit of the cash collateral 

account; 

C equals the aggregate value of substitute assets. The portion of substitute assets 

above 20% of the portfolio value will be given zero credit in the ACT; 

D is equal to the aggregate value of all permitted investments. Both substitute 

assets and permitted investments will be accounted for at the market value assessed 

as at the last business day before an ACT calculation and subject to a further haircut 

agreed, from time to time, with Fitch. 

Y is an amount intended to cover the potential shortfall in the next following 

payment due under the hedging agreements. This item is size based on the period of 

time between two interest payment dates plus two months; 

Z is an amount intended to address potential negative carry in the transaction 

caused by holding funds in the covered bond account and is sized by multiplying the 

aggregate covered bond principal outstanding by their weighted average remaining 

maturity and by a negative carry factor of 50 basis points. 

Source: Fitch 

In addition, following service of a notice to pay on the issuer (but prior to an issuer event 

of default and service of an issuer acceleration notice), the issuer must ensure that on each 

calculation date following an issuer event of default, the amortisation test is passed: 

meaning the aggregate loan amount will be in an amount at least equal to the aggregate 

principal amount outstanding of the covered bonds then outstanding. The cash manager 

will perform the amortisation test on each calculation date. A breach of the amortisation 

test will constitute an issuer event of default, which will entitle the bond trustee to serve 

an issuer acceleration notice on the issuer declaring the covered bonds immediately due 

and repayable. 

15 | 10 September 2009 



Table 9. Definition of adjusted aggregated loan amount in the AMT 

The adjusted aggregate loan amount of the portfolio is defined according to the 

following formula: 

A + B + C + D + E Z 

A is the sum for all loans of the lower of: 

(i) the loan balance where loans are less than three months in arrears and 70% of the 

loan balance where loans are three months or more in arrears; and 

(ii) the indexed valuation where loans are less than three months in arrears and 70% 

of the loan indexed valuation where loans are three months or more in arrears; 

B equals the aggregate amount of cash standing to the credit of the cash collateral 

account; 

C equals the aggregate value of substitute assets. The portion of substitute assets 

above 20% of the portfolio value will be given zero credit in the ACT; 

D is equal to the aggregate value of all permitted investments. Both substitute 

assets and permitted investments will be accounted for at the market value assessed 

as at the last business day before an ACT calculation and subject to a further haircut 

agreed, from time to time, with Fitch; 

Z is an amount intended to address potential negative carry in the transaction 

caused by holding funds in the covered bond account and is sized by multiplying the 

aggregate covered bond principal outstanding by their weighted average remaining 

maturity and by a negative carry factor of 50 basis points and; 

E is equal to the aggregate amount of the cash generated by the cover pool in the 

period preceding the amortisation test calculation. 

Source: Fitch 

In line with the rating agencies in our view, the asset coverage test is strong and sufficient 

to ensure a minimum level of over-collateralisation on the covered bonds to protect 

bondholders against specific market and liquidity risks. Further, we see the amortisation 

test as strong and sufficient enough to ensure covered bonds are adequately collateralised 

by the assets in the cover pool at all times, ultimately up to the point of issuer default and 

payment acceleration. Furthermore, we see the true sale and the issuer structure as 

sufficient to ensure asset segregation. Below we outline the programme terms in the event 

of issuer default and ultimately in the case of issuer default. The event of issuer default 

will be triggered if the monthly asset cover test fails. 

16 | 10 September 2009 



Table 10. Description of events of default 

Event 

The asset coverage test 

fails 

The issuer fails to pay any 

interest or principal 

amount when due 

Initiation of bankruptcy 

proceedings against the 

issuer 

Issuer default 

Terms 

An issuer acceleration notice and a notice to pay will be 

issued to the issuer. 

No covered bonds can be issued and the cover pool 

becomes static. No new substitution assets will be 

included in the cover pool whereas liquidation of mortgage 

assets is the only means to pass the amortisation test in 

the case of falling house prices. In so far the asset 

coverage test is not breached, further covered bond 

issuance can occur. 

Activation of the covered 

bond guarantee 

Covered bondholders submit an unsecured claim against 

the issuer and invoke the covered bond guarantee via the 

covered bond trust. 

The amortisation test fails 

The issuer fails to pay any 

interest or principal amount 

when due 

Under the covered bond guarantee the covered 

bondholders continue to receive scheduled payments 

from the issuer, i.e. no acceleration of payments. 

All payments on mortgages in the cover pool are collected 

in a GIC account for the benefit of the covered 

bondholders. 

To the extent the issuer has insufficient funds to repay the 

covered bonds in full on the maturity date, the unpaid 

amount will automatically be deferred and would be due 

and payable a year later. This will only be the case if the 

covered bond programme includes a soft bullet structure. 

Issuer default 

Covered bondholders enforce their security against the 

issuer. 

The issuer assets are liquidated for the benefit of covered 

bondholders. Proceeds from the liquidation of the assets 

are disbursed to covered bondholders on a pro rata basis 

at par with all covered bonds ranking pari passu 

regardless the maturity of the covered bonds. 

In-so-far as assets are inadequate to cover the claims of 

covered bondholders, investors maintain an unsecured 

claim against the issuer for any unpaid amounts under the 

covered bonds 


17 | 10 September 2009 



Legal framework governing CRH operations 

CRH enjoys a unique legal framework only regulating the business of CRH. As for 

credit institutions regulated by the ObF framework the provisions for the mortgage 

market are regulated by the provisions codified as Sections L.313-42 to L.313-49 of the 

Monetary and Financial Code, except privilege for bondholders which is assigned in the 

article 13 of act 85-695 of July 1985. The specific framework for CRH is codified in 

Article R.313-20 to R.313-25 of the Monetary and Financial Code. In addition to the legal 

framework CRH also applies internal rules and regulations. 

CRH is a specialist bank restricted in its business. The sole purpose of CRH is to 

refinance bank loans for housing purchases. Thus, CRH cannot act as a mortgage bank 

lending to individuals. CRH issues bonds and lends the borrowed amount to banks in the 

same conditions with respect to interest rate and maturity. 

Common to other covered bond legislations the legal framework stipulates priority 

claims under all circumstances to the payment of the interest and principal in favour of 

bond holders. 

Only French first lien mortgages or, under certain conditions, guaranteed loans 

(maximum 35%) may constitute collateral for CRH issuance. Concerning the LTV ratio 

the same rules as for issuers under the ObF framework apply. Therefore, the LTV ratio is 

capped at 60% if both commercial loans and mortgage loans are used as collateral. If only 

mortgages are applied the LTV ratio can be raised to 80%. A LTV ratio of 100% is 

possible if a guarantee from the social security fund (FGAS) is applied. 

The cover assets will initially remain on the balance of the participating banks but are 

pledged as collateral for CRH loans to banks (in the form of promissory notes). In the 

event of default by a borrowing bank, CRH acquires full ownership of the portfolio, 

automatically and without formality and notwithstanding any provisions to the contrary. It 

may then sell the portfolio and use the proceeds to buy and then cancel the bonds 

corresponding to the loan made to the defaulting bank. Furthermore, if a borrowing bank 

defaults CRH may also, if required, call on the banks that are its shareholders to provide 

cash in an amount up to 5% of its outstanding loans. 

The law specifies a minimum O/C of 25%. With respect to ALM-restrictions, the 

average life of the portfolio assets must at all times be to a large extent equal to the 

residual life of CRH loans, and the average interest rate must equal or exceed that of the 

CRH loans (interest rate payments are received five days in advance of coupon 

payments). Furthermore, no currency risk is allowed and liquidity risk is limited due to a 

5% liquidity facility of borrowed funds. 

CRH is subject to specific supervision by the Commission Bancaire and CRH itself 

performs oversight of borrowing banks. This includes verification of the lists of pledged 

loans and regular audits of these pledged loans, based on sampling, carried out at the 

borrowing banks. Should these audits reveal ineligible loans CRH has the mandate to 

require the bank in question to increase cover assets to compensate for the shortfall 

identified. If the bank’s outstanding loans are insufficient to make up the shortfall, it is 

required to immediately acquire the bonds corresponding to the loan granted it and 

deliver them to CRH as repayment. Finally, CRH is also subject to audit by its 

shareholder banks. 

In 2006 CRH received approval from Banque de France to issue bonds that were UCITS 

22(4) compliant. As they furthermore are CRD compliant, covered bonds from CRH 

enjoy preferential treatment with respect to risk weighting (10% under the Revised 

Standard Approach). 

18 | 10 September 2009 



The French economy and housing market 

The French housing market started its boom a decade ago and from 2002 until 2006 

prices of existing homes increased 10% or more annually. House prices peaked last 

summer and began to decline rapidly in the fourth quarter of 2008 coinciding with the 

escalation of the financial crisis. 

House price boom and bust 

Since its peak level nominal house prices have declined 7.7% for existing houses and 

13.5% for new homes in Q1 2009 (latest data available). This brings nominal prices for 

existing homes back to their Q2 2006, still 77% above the price level at the beginning of 

2002. We project that house prices have declined another 5% since Q1. In real terms 

prices on new houses have declined by approximately 10% since their peak level in Q3 

2007. 

The French economy has been relatively resilient to the global crisis. GDP declined just 

3.4% from its peak level in Q1 2008 until Q1 2009 and somewhat surprisingly France 

already returned to positive growth in Q2 (0.3 % q/q). Industrial production bottomed in 

April and French manufacturing PMI has increased sharply in recent months. We 

anticipate a strong rebound in growth in H2 2009 driven primarily by inventories and 

exports – followed by lower, but also more broadly based growth in 2010. 

Source: Reuters EcoWin 

Housing start slowdown 

Unemployment is increasing at a rapid pace and unemployment expectations are still at a 

high level. This adds new fuel to the housing market downturn. We expect a stabilisation 

of the labour market in early 2010. Consumer confidence has improved, but is still at a 

low level. 

The housing market is supported by low interest rates, but lending standards have been 

tightened significantly during the last year and although the financial crisis now appears 

to be receding, financial conditions will still put a brake on the housing market for some 

time to come. 

Source: Reuters EcoWin 

The construction sector has been in decline for a year and this is likely to continue for 

quite some time. Construction sector confidence has increased quite sharply in 2009 

albeit from historically low levels. The current confidence level still signals contraction. 

The decline in construction combined with an increase in the number of new homes sold 

resulted in a sharp decline in the stock of new homes for sale in Q1 2009. The stock is 

nevertheless still very high – just around 100,000 unsold new homes – and it will take 

another year of fast reduction of this pile of unsold homes just to reach the historical 

average. 

House prices are expected to decline another 10-15% during the next year before a 

stabilisation will begin to materialise supported by labour market recovery and a 

reduction in housing affordability (house prices relative to household income). The main 

risks that may prolong the housing market downturn are a jobless recovery, tight credit 

standards and interest rate increases (more charts on next page). 

19 | 



PMI signals strong rebound 

Consumer confidence 

Source: Reuters Ecowin 

Source: Reuters Ecowin and Markit 

Unemployment increases sharply 

The recession is over 

Source: Reuters Ecowin and own calculations 


Construction sector PMI sends positive signals 

A pile of new homes 



20 | 



French market for housing loans 

In contrast to other European countries the most predominant house loan is not a 

mortgage but instead a guaranteed loan. Currently the market is split approximately 

evenly between mortgage loans and guaranteed loans, but for new loans, almost two out 

of three is a guaranteed loan. 

French home buyers have had, since 1974, the option of taking a guaranteed (but 

otherwise unsecured) loan. The guarantee is provided by a third party, usually a mutual 

insurance company. In case of default the guarantor undertakes the obligations of the 

borrower. In addition the guarantor undertakes the recovery proceeds. 

Guaranteed loans are as mentioned very common in France and also qualify as eligible 

collateral for issuance of ObF. The popularity of guaranteed loans can be explained by the 

high costs of both registering and unregistering a traditional mortgage combined with the 

fact that it is a very bureaucratic and time-consuming process. On average the cost of 

taking out a traditional mortgage loan is 5% upfront, whereas a guaranteed loan is only 1- 

2% upfront. In addition, a part of the fee paid for a guarantee will be repaid at redemption 

(provided that it has not been called of course). Also, the risk weight of a guaranteed loan 

is lower than of a mortgage (20% vs. 50% under Basel1). Under the Basel2/CRD the 

advantage of guaranteed loans is expected to diminish. To sum up guaranteed loans are 

more cost efficient and flexible from both the borrower and lender’s point of view. 

Defaulting loans (> three month arrears) are physically transferred from the cover pool to 

the guarantor who thereafter undertakes the borrower’s payments. In 50% of the cases the 

guarantor and the borrower reach an agreement within six months and the loan is 

transferred back to the pool. Otherwise final payment under the guarantee can take 

anything from six months to two years from the transfer. In comparison, should a 

mortgagor fail to pay foreclosure procedures usually take at least three years. 

As mentioned guaranteed loans are also eligible for ObF issuance, however they may 

only constitute a maximum of 35% (raised in 2007 from 20%) of the cover pool. A 

further requirement is that the guarantee is provided by a third party to be eligible for ObF 

issuance. Guarantees provided by in-house companies – i.e. any wholly or partly owned 

subsidiaries – are not eligible. Most common-law based issuers currently apply in-house 

guarantors (see separate descriptions under the respective issuer profiles below); currently 

BNP is the only active issuer that does not. In the case of BNP, Crédit Logement provides 

the guarantee. Credit Logement is the largest provider of guarantees and currently enjoys 

a market share of more than 50%. We also expect HSBC France to rely exclusively on 

Credit Logement as a guarantor although we note its covered bond programmes include 

an option to use others. 

Below we have included a short description of the guarantors of the existing issuers of 

covered bonds. 

French guarantors 

The market is split between players with bank status, such as Crédit Logement, CMH and 

the SOCAMI and insurance companies such as e.g. SACCEF and CAMCA. The main 

difference between the two is a question of prudential requirements. For those with bank 

status, there is 100% risk weighting for the guarantees provided and an 8% capital 

adequacy ratio, compared with 16-18% of premiums or a percentage of claims for 

insurance companies, which is much more favourable. 

21 | 



Crédit Logement (Aa2 stable/AA stable/--) is the largest guarantor in France with a 

market share of some 50% and outstanding commitments of some EUR155bn year-end 

2008. Thus, most issuers do to some extent benefit from guaranteed loans from Crédit 

Logement. Since 1999, Crédit Logement has been jointly owned by nearly all of the large 

French banking groups, with its three largest shareholders being Crédit Agricole (33%), 

BNP Paribas (16.5%) and Société Générale (13.5%). 

All shareholders reconfirm every sixth months the mutual guarantee in proportion of their 

outstanding loans guaranteed. The mutual guarantee fond of Crédit Logement stood at 

EUR2.6bn at year-end 2008. Crédit Logement enjoys an ultimate support from the French 

banking system and all shareholders have written an explicit guarantee to rebuild mutual 

fond should a shareholder default. Should Crédit Logement default the loans guaranteed 

can be converted to traditional mortgages. 

CMH (Cautionnement Mutuel de l’Habitat) is one of the guarantors of CM-CIC and also 

a member of Crédit Mutuel Centre Est Europe (CMCEE). It is therefore relevant to 

consider whether guarantees provided by CMH are valid should CMCEE default. The 

rating agencies are very clear on this point and Fitch, for example, states that if CMCEE 

becomes bankrupt, the same applies to CMH. To address this risk, the programme 

stipulates that if BFCM (Banque Fédérative du Crédit Mutual) is downgraded below A- it 

must fund a reserve account in the CMCICB’s books representing the cost needed to 

register the mortgage on the CMH loans. Should CMCEE be downgraded below BBB, 

BFCM will have two months to find a guarantor rated at least A- to guarantee CMH’s 

obligations or start to register mortgages on CMH-guaranteed loans. After another two 

months, CMH-guaranteed loans will not be taken into account when performing asset 

coverage tests. 

SOCAMI (Sociétés de Caution Mutuelle) and CASDEN (Aa2 stable/--/A+ stable by 

Moody’s/Fitch) provide guarantees for Banque Populaire’s covered bond programme. 

Both SOCAMI and CASDEN are both members of BPCE and it is therefore relevant to 

consider whether guarantees provided by these entities are valid should BPCE default. In 

our opinion, if BPCE becomes bankrupt, the same applies to SOCAMI and CASDEN. 

To mitigate this risk, the programme stipulates that if BPCE is downgraded below (A3/A- 

) it must fund a reserve account representing the costs needed to register the mortgage on 

the loans guaranteed by in-house guarantors. Should the Group be downgraded below 

BBB, mortgage registrations or outside group guarantors become compulsory in order to 

provide further protection to covered bond investors even though the guarantors have 

funds of their own. 

SOCAMI is offered to the best customers of the bank and SOCAMI decides whether to 

grant guarantee. There is a similar policy for CASDEN. As a consequence, default rates 

have historically been much lower in portfolios with SOCAMI or CASDEN guarantees 

only, than the average default rate in the global portfolio of the BPCE Group. 

CEGC (Compagnie Européenne de Garanties et Cautions, previously SACCEF) rated A+ 

with stable outlook by S&P, is the second largest provider of guaranteed loans in France 

with a total loan commitment end-2008 of EUR53bn. CEGC provides guarantees for 

CNCE and benefits from the support of both Groupe Caisse d’Epargne and Groupe 

Banque Populaire, as it is 100%-owned by Natixis. 

CAMCA (Caisse d'Assurances Mutuelles du Crédit Agricole) is an insurance company 

that provides guarantees in favour of home loans from Credit Agricole. Due to the status 

as an in-house guarantor Credit Agricole’s covered bond programme has built in a 

number of contractual agreements that should mitigate risk arising from this structure 

including among others rating triggers and a 50% cap on the amount of CAMCA 

guaranteed loans in the cover pool. 

22 | 



Table 11. Cover pool assets backed by French guarantors (% of total cover pool, if available) 

BPCOV BNPPCB CMCICB GCECB ACACB HSBCCB 

Credit Logement Credit Logement Credit Logement 

- Credit Logement Credit Logement* 

(4%) 

(55%) 

n.a 

41% 

CASDEN 

- CMH 

SACCEF 

CAMCA 

- 

(27%) 

n.a. 

(72%) 

13% 

SOCAMI 

(28%) 

- - - - - 

Source: Danske Markets and respective issuers, 

*: According to the covered bond programme of HSBCCB Credit Logement is the primary guarantor for HSBC France 

Conclusion 

The French market has undergone significant development in recent years and stands out 

as a quite unique market most obviously through the three different structural setups. 

Another unique feature for France is the predominant position of guaranteed loans. 

The introduction of common-law based covered bonds alongside law-based covered 

bonds from SCFs and CRH has prompted nine new issuers since 2006 bringing the total 

number of issuers to 13. BNP Paribas is in the unique position to fund itself via covered 

bonds through all three channels. 

France has thus gone from being a rather inferior player in the European covered bond 

market to one of the most dominant countries in terms of issuing activity. 

This of course raises a relevant question, namely whether this will lead to supply 

pressure. If supply resumes at the previously high level when markets get functional 

again, we cannot rule out that the performance of French covered bonds will be affected 

by new supply. However, we note the presence of a large domestic investor base that will 

help absorb new supply. 

In the following sections we provide a comprehensive overview of issuer profiles on 

existing and upcoming French covered bond issuers, law based as well as common-law 

based. The issuer profiles contain descriptions on business model, funding profile and 

asset quality etc. 

With all major French banks now issuing common-law based bonds and with guaranteed 

loans still being preferred over traditional mortgage loans, a possible revision or 

expansion of the French legal framework is a relevant issue to bring up in our opinion. 

One possibility is an “umbrella” solution similar to that of the UK. The legislative 

framework in the UK is designed to provide the necessary underpinning for UCITS 

compliance but is not designed to prescribe the complete design and contractual 

arrangements for the product. Simply, the legislation provides a principle-based and 

outcome-focussed framework with the necessary legal requirements for the regime and its 

special public supervision. 

If UCITS compliance is ensured current common-law based covered bonds will receive 

preferential risk weighting similar to ObF, which will broaden the investor base and thus 

enhance the ability of absorbing new supply. That said, currently a legal framework and 

UCITS compliance are hardly the main drivers for a spread narrowing for common-law 

based covered bonds. On the other hand, it is worth mentioning that the special rule 

regarding French ObF in CRD (Annex VI) is to expire by the end of 2010. Hence if this 

special rule is not reinforced a number of French ObFs will lose their preferential risk 

weight. 

23 | 



Anyhow, focus is currently on issuers’ financial performance and indeed the French 

housing market. Banks benefit from their investment banking business, which are 

characterised by historically high profit, although some deterioration must be expected 

due to the fierce competition. Also banks are generally well capitalised and enjoy 

significant loan-loss reserves. However, French banks’ high exposure to the housing 

market will affect the performance of French banks both through lower revenues due to 

lower mortgage activity, and higher credit losses. We have already seen a cooling of the 

French housing market and we forecast the housing market will remain weak in the 

coming months in face of a continued deterioration of the economic climate in France. A 

softening of the labour market and a tightening of credit standards and increasing interest 

rates together pose the greatest risk to the housing market and subsequently the banks 

exposed to the market. However, we note that banks in general have adequate loan loss 

coverage and that French home owners are less indebted than many European peers. 

Further, as the prevailing home loan in France is fixed rate, French home owners are less 

sensitive to interest rate fluctuations. 

24 | 




Banque Populaires & 

Caisse d'Epargne 

Common-law covered bonds 

Company profile 

The issuers Group Caisses d’Epargne Covered Bonds (GCECB) and Banques Populaires 

Covered Bond (BPCOV) are French credit institutions with limited purpose and are 

subject to French banking authorities (but not subject to the covered bond legislation in 

France). 

GCECB is a 95%-owned subsidiary of Caisse Nationale des Caisses d’Epargne (CNCE) 

the central body of the Group Caisses d’Epargne. The remaining 5% is owned by 

Compagnie de Financement Foncier (CFF). BPCOV (Banques Populaires Covered 

Bond), is a 99.99% owned subsidiary of Banque Fédérale des Banques Populaires 

(BFBP), which is the central body of the 20 Banques Populaires member banks. GCECB 

and BPCOV serve as pure funding vehicles, thus there is no personnel at the entities and 

all administration, etc. is subcontracted to the parent company. 

With effect 3 August 2009 the central bodies of Groupe Banque Populaire and Groupe 

Caisse d’Epargne, CNCE and BFBP merged into BPCE, forming France’s second largest 

banking group. BPCE will rely on two autonomous retail banking networks, those of the 

17 Caisse d’Epargne banks and the 20 Banque Populaire banks. The merger was a natural 

consequence of an already close cooperation on the central level. The new combined 

group will have around a 20% market share, 34 million customers, 8,000 branches. BPCE 

will be jointly owned by the Banque Populaire Group and the Caisse d’Epargne Group. It 

will own the two groups’ retail banking subsidiaries and their production entities (in 

particular Natixis). BPCE is mainly a retail-oriented bank (79% of operating income 

stems from domestic retail banking), but is also involved in insurance, real estate 

development as well as corporate and investment banking via Natixis. BPCE will share a 

legally binding cross-guarantee mechanism with the 37 backing regional banks, which 

ultimately benefits bondholders as they have recourse to BFBP and CNCE, now BPCE. 

BPCE has not released consolidated figures yet, hence in the following we rely on Fitch 

Ratings analysis on GCE of 29 June 2009 which includes their pro-forma, unaudited 

figures for the new entity. Note that CNCE owns 75% of Crédit Foncier de France (see 

issuer profile on CFF). 

Financial performance 

The 2008-numbers were heavily impacted by poor performance in the investment 

banking unit Natixis due to the exposure to CDOs and monoliners. Hence, for the first 

time since 1999 both GCE and BP recorded a full-year loss in operating profit mainly 

driven by a negative impact from Natixis. An AFS reclassification on EUR18bn only 

made a positive contribution of EUR0.3bn in profits and Natixis still carries a EUR60bn 

portfolio of troubled or illiquid assets, according to Fitch. On the bright side, all other 

business areas besides Natixis recorded positive results (although all significant areas 

were down compared with 2007). Of the operating income approx. 79% stemmed from 

domestic retail banking (primarily commercial). 

Table 12. Rating 

Covered bond rating 

Aaa/AAA/- 

Issuer rating 

Aa3/A+/A+ 

Fitch D-factor - 

Fitch supporting O/C - 

Moodys C-score 5.4%/5.5% 

Moodys TPI 

Probable 

S&P Category (expected) 3 

Risk weight 20% 

Source: Danske Markets, rating agencies 

Table 13. Financial information BPCE 

EURm 2008 2007 

Net interest income 9,467 8,449 

Fees & commissions 7,661 7,560 

Net gain/losses -3,814 779 

Pre-provision income 548 3,017 

Losses & provisions 3,162 820 

Operating profit -2,614 2,197 

NPL 

Loan loss coverage 

Cost/income ratio 

Core capital ratio 

Total capital ratio 

Source: Fitch 

Table 14. More info 

Bond ticker 

CDEE, BPCOV 

Website 

groupe.caisse-epargne.com 

banquepopulaire.fr 




+45 45 12 85 65 



Banque Populaires & 

C i d'E 

Business model and funding profile 

To our knowledge no official remarks have been made about the future of the two almost 

identical covered bond programmes of CNCE and BFBP, but it would make sense to 

merge the programmes as they have recourse to the same entity, the new BPCE 

The cover bond programmes of BFBP and CNCE are almost identical. The covered bonds 

will be direct, unsecured and unsubordinated obligations of GCECB/BPCOV, French 

credit institutions with limited purpose (similar to ‘LLP’ in the UK). The proceeds from 

the covered bond sale will be lent to CNCE/BFBP pursuant to the terms of a “Borrower 

facility” agreement. The terms of the loan are identical to the covered bond. As long as 

CNCE/BFBP are solvent, they will manage all cash transactions and the day-to-day 

management of the issuers including servicing of the covered bonds and the debt between 

the bank and the issuer, and the performance of the obligations and the issuer's regulatory 

duties. At group level, BPCE’s funding comes primarily from customer retail deposits, 

the bond market and equity. 

Cover pool and asset quality 

The cover pool of GCE currently (as of April 2009) stands at EUR29bn (541,610 loans of 

which none are in arrears) and is made up of French first-lien residential mortgage loans 

(28%, 2008-data) and residential loans with a guarantee (72%, 2008-data). Note that 

contrary to BNP Paribas, GCECB only allows French collateral and the currency of the 

loans granted is limited to euro and Swiss franc. The vast majority of properties are 

owner-occupied (93%) but the cover pool also includes buy-to-let (4%) and second 

homes (2%). 

Guaranteed home loans are guaranteed by Compagnie Européenne de Garanties et 

Cautions (previously SACCEF) which is a member of the Group Caisses d’Epargne. 

The cover pool of BPCOV currently (as of July 2009) stands at EUR19bn (270,687 loans 

of which none is in arrears) and is made up of French first-lien residential mortgage loans 

(41%) and residential loans with a guarantee (59%). Of the guaranteed loans, in-house 

guarantors SOCAMI and CASDEN guarantee 46% and 47%, with the rest guaranteed by 

Credit Logement. Note that contrary to BNP Paribas, GCECB only allows French 

collateral and the currency of the loans granted is limited to euro and Swiss franc. The 

vast majority of properties are owner-occupied (93%) but the cover pool also includes 

buy-to-let (4%) and second homes (2%). 

Table 15. Funding profile 2008 

Total balance 

EUR1,206bn 

Deposits 47% 

Debt securities 24% 

Financial liabilities and deriv.. 18% 

Others 8% 

Equity 3% 

Source: Danske Markets, Fitch 

Table 16. Cover pool info GCE 

Cover pool 

EUR 29.3bn 

Current O/C 

40% (8.1%) 

(committed) 

Average loan size 54,193 

WA LTV 68% 

WA Indexed LTV 57% 

Seasoning 

44 months 

NPL 0% 

Fixed rate-mortgages 86% 

Geography 

Only France 

-Ile-de-France 19% 

- Rhône-Alpes 12% 

Asset type 

Only residential 

- Owner-occupied 93% 

-Buy-to-let 4% 

-Second home 2% 

- Other 0% 

Source: Danske Markets, GCE 

Table 17. Cover pool info BP 

Cover pool 

EUR 18.5bn 

Current O/C 

30% (8.1%) 

(committed) 


WA LTV 70% 


Seasoning 

39 months 

NPL 0% 


Geography 

Only France 



Asset type 





- Other 0% 

Source: Danske Markets, BP 

26 | 10 September 2009 




BNP Home Loans CB 



BNP Paribas Covered Bond (BNPPCB) is a French credit institution with limited purpose 

and is subject to French banking authorities (but not subject to the covered bond 

legislation in France). BNPPCB is a 99.9%-owned subsidiary of BNP Paribas (BNP) 

rated Aa1/AA+/AA by Moody’s/S&P/Fitch (all with negative outlook in connection with 

full-year report that showed pressure on profitability). BNPPCB serves as a pure funding 

vehicle, thus there is no personnel at BNPPCB and all administration, etc. is 

subcontracted to BNP. Covered bond investors have full recourse to BNPP in the event of 

default. 

BNP is a universal bank and ranks second in France after Credit Agricole with high 

market share in core products. BNP benefits from a large national network in France with 

some 2,200 branches which originate 75% of the loan stock. The residual is originated 

through internet and loan brokers. However, regardless of the distribution channel, the 

same credit scoring method is performed. 

In Europe, BNP ranks fifth measured on equity. Roughly half of revenues (54%) are 

generated by retail banking (France and international) with Corporate and Investment 

Banking second (28% of revenues) and Asset Management third (18%). BNP has an 

international profile and generates 27% of revenues outside Europe, primarily North 

America (12%). France is of course BNP’s largest market in Europe accounting for 45% 

of total revenues, while Italy ranks second through the acquired Italian retail bank BNL 

(16% of revenues). Thus, BNP is very well diversified both geographically and in terms 

of business areas. In October 2008, BNP announced the acquisition of Fortis in Belgium 

and Luxembourg. Following the acquisition of Fortis Bank, BNP Paribas is now the 

number 1 deposit taker in the eurozone (total deposits EUR540bn Q1 2009), highlighting 

the systematically importance of the bank. 

Table 18. Ratings 

Covered bond rating Aaa/AAA/AAA 

Issuer rating 

Aa1n/AAn/AAn 

Fitch D-factor 20.3% 

Fitch supporting O/C 11.1% 

Moodys C-score - 

Moodys TPI 

Probable 




Table 19. Financial information 

EURm 2008 2007 



Net gain/losses 1,634 8,699 

Pre-provision income 8,091 11,256 

Losses & provisions 5,752 1,725 

Operating profit 2,339 9,531 

NPL 3.7 - 

Loan loss coverage 76% - 


Core capital ratio 7.8% 7.3% 

Total capital ratio 11.1% 10.0% 




BNPP recorded a sharp decrease in earnings in 2008 mainly due to underperformance in 

the CIB unit (only unit to record a loss in operating profit). However, compared with 

most major European banks, BNP Paribas has actually weathered the financial storm very 

well thanks to a well diversified strategy. The retail business was the least affected unit 

although impairment charges lowered the profit compared with 2007. The CIB unit was 

similar to French peers negatively affected by valuation adjustments and charges against 

monoliners, and the exposure to Madoff (EUR345m). As peer banks BNP reclassified a 

part of the portfolio to AFS (thereby taking a negative adjustment of some EUR4.7bn 

directly on equity). Without this reclassification BNP would have encountered a loss for 

the year in operating profit. 


Website 


BNPP 

bnpparibas.com 



+45 45 12 85 65 



BNP Home Loans CB 


BNP Paribas has a diversified and integrated business model which is rooted in retail 

business, with roughly 50% of revenues coming from retail banking. Historically, retail 

deposits have constituted around 30% of BNP Paribas total funding source. After the 

acquisition of Fortis BNP is now Europe’s largest deposit taker with total deposits of 

EUR540bn (2008). However, due to the large amount of CIB activities (taking up roughly 

half of the balance) deposits only constitute approx. 20% of the total balance. 

BNP Paribas has a strong capital position with Tier 1 ratio at 7.8% as of end-2008. In the 

medium term, BNP Paribas targets a Tier 1 ratio above 7.5%, and it wants to increase 

equity by retaining generated earnings. BNP Paribas is a strong European covered bond 

issuer with covered bonds constituting roughly 10% of total outstanding debt. 


Total balance 

EUR 2,075bn 

Deposits 20% 

Interbank funding 15% 

Long term funding incl cb 5% 

Derivat. & trading liabilities 48% 

Other 12% 

Equity 2% 


The covered bonds will be direct, unsecured and unsubordinated obligations of BNP 

Paribas Covered Bonds (BNPPCB, the issuer, a 99.9%-owned subsidiary of BNP 

Paribas), a French credit institution with limited purpose (similar to the UK ‘LLP’). The 

proceeds from the covered bond sale will be lent to BNP pursuant to the terms of a 

‘borrower facility’ agreement. The terms of the loan are identical to the covered bond. As 

long as BNP is solvent, it will manage all cash transactions and the day-to-day 

management of the issuer including servicing of the covered bonds and the debt between 

the bank and the issuer, and the performance of the obligations and the issuer’s regulatory 

duties. Prior to a default of BNP, the collateral is on the balance sheet of BNP. 


As of 30 May 2009, the cover pool was EUR23bn. The cover pool consists entirely of 

self-originated French residential home loans, mainly owner-occupied (81%), but also 

buy-to-let (14%) and second homes (5%). No substitution assets are included in the cover 

pool. Guaranteed home loans make up 55% of the cover pool all of which is guaranteed 

by Crédit Logement 

As of 30 May 2009 O/C was 32%. There are no NPLs in the cover pool. For BNPP as a 

whole, impaired loans in year-end 2008 constituted 3.7% of total loans and receivables. 

Table 22. Cover pool info 

Cover pool 

EUR 23.3bn 

Current O/C 

32% (8.1%) 

(committed) 

Average loan size 

EUR96,328- 

WA LTV 69% 


Seasoning 

44 months 

NPL 0% 


Geography 

Only France 



Asset type 





- Other 0% 


28 | 10 September 2009 




BNP Public Sector SCF 

Obligation Fonciéres 


BNP Paribas Public Sector SCF (BNPSCF), a Société de Crédit Foncier (SCF) with the 

sole purpose of issuing ObF, is 99.9% owned by BNP Paribas (BNPP) rated 

Aa1/AA+/AA by Moody’s/S&P/Fitch (all with negative outlook in connection with fullyear 

report that showed pressure on profitability). BNPSCF serves as a pure funding 

vehicle, thus there is no personnel at BNPSCF and all administration, etc. is 

subcontracted to BNPP. Covered bond investors have full recourse to BNPP in the event 

of default. 

BNPP is a universal bank and ranks second in France after Credit Agricole with high 

market share in core products. BNPP benefits from a large national network in France 

with some 2,200 branches which originate 75% of the loan stock. The residual is 

originated through internet and loan brokers. However, regardless of the distribution 

channel, the same credit scoring method is performed. 

In Europe, BNPP ranks fifth measured on equity. Roughly half of revenues (54%) are 

generated by retail banking (France and international) with Corporate and Investment 

Banking second (28% of revenues) and Asset Management third (18%). BNPP has an 

international profile and generates 27% of revenues outside Europe, primarily North 

America (12%). France is of course BNPP’s largest market in Europe accounting for 45% 

of total revenues, while Italy ranks second through the acquired Italian retail bank BNL 

(16% of revenues). Thus, BNPP is very well diversified both geographically and in terms 

of business areas. In October 2008, BNPP announced the acquisition of Fortis in Belgium 

and Luxembourg. Following the acquisition of Fortis Bank, BNP Paribas is now the 

number 1 deposit taker in the eurozone (total deposits EUR540bn Q1 2009), highlighting 

the systematically importance of the bank. 



Issuer rating 

Aa1n/AAn/AAn 



Moodys C-score 8.8% 

Moodys TPI 

Probable-High 





EURm 2008 2007 







NPL 3.7 - 

Loan loss coverage 76% - 




EURm 2008 2007 



BNPP recorded a sharp decrease in earnings in 2008 mainly due to underperformance in 

the CIB unit (only unit to record a loss in operating profit). However, compared with 

most major European banks, BNP Paribas has actually weathered the financial storm very 

well thanks to a well diversified strategy. The retail business was the least affected unit 

although impairment charges lowered the profit compared with 2007. The CIB unit was 

similar to French peers negatively affected by valuation adjustments and charges against 

monoliners, and the exposure to Madoff (EUR345m). As peer banks BNPP reclassified a 

part of the portfolio to AFS (thereby taking a negative adjustment of some EUR4.7bn 

directly on equity). Without this reclassification BNP would have encountered a loss for 

the year in operating profit. 



Website 


BNPP 

bnpparibas.com 

Chief Analyst 


+45 45 12 80 43 



BNP Public Sector SCF 


As an issuer of ObF under supervision of the French FSA, BNP SCF is operating 

according to specialist banking principles meaning the sole purpose of BNP SCF is to 

fund public loans and substitution assets by issuance of ObFs. This is the reason why the 

cover pool which stands at EUR1.5bn is so far funded by the issuance of EUR1bn 

covered bonds. In June 2009 BNP SCF made its inaugural covered bond benchmark 

issuance with a maturity of 5y. 

The public loans (sovereign-backed loans including export and aircraft loans benefiting 

from guarantees granted by export credit agencies) funded by BNP SCF are originated by 

BNPP. The public loans must oblige to the eligibility criteria stated in the French covered 

bond act (article L.515-13 of the French Monetary Code). 


Total balance 

EUR 2,075bn 

Deposits 20% 


Long term funding incl cb 5% 


Other 12% 

Equity 2% 


BNP SCF is exposed to some refinancing risk; assets have an average maturity of 7y and 

liabilities have an average maturity of 5y. If BNPP is downgraded below a certain rating 

threshold, it is committed to contribute cash collateral for an amount equal to the higher 

of EUR500m and any amount due under the covered bonds outstanding within the 

following 180 business days. 

BNP SCF has mitigated any market risk by swapping all cash flows into floating rate euro 

cash flow (Euribor plus a margin). 


The cover pool of BNP Paribas’ Public Sector SCF Programme is composed solely of 

loans backed by OECD sovereigns with strong credit ratings. The initial loan portfolio 

stands at EUR1.5bn and is guaranteed by France (39.2%), the UK (3.9%), US (44.6%), 

and Germany (12.2%). There are neither bonds nor ABSs in the cover pool, and all the 

collateral included bears a 0% risk weight. Going forward, loans to sovereigns, central 

banks, and public institutions can be included in the cover pool. 

The mix between fixed rate and floating rate loans is 29% and 71%, respectively. 

The mix between EUR and USD is 30% and 70%, respectively. 

In order to enhance credit quality, BNP SCF is contractually committed to maintain a 

minimum amount of overcollateralization of 5%. 


Cover pool 

EUR 1.5bn 

Current O/C 

50% (5%) 

(committed) 


EUR132m- 

WA LTV - 

WA Indexed LTV - 

Seasoning - 

NPL 0% 

Fixed rate-loans 29% 

Geography 

France 39% 

US 45% 

Germany 12% 

UK 4% 


30 | 10 September 2009 




CFF 



Compagnie de Financement Foncier (CFF) dates back to 1852 when Crédit Foncier de 

France was established as the first societé de credit foncier to issue obligations fonciéres. 

Soon after the establishment Crédit Foncier de France became the leading lender to local 

authorities and in the second half of the 20th century CFF became the leading lender 

within state-subsidised housing. In 1999 when the legal framework for obligations 

fonciéres was revised, Groupe Caisse d’Epargne acquired Crédit Foncier de France and 

the same year Compagnie de Financement Foncier (CFF) was founded as a fully-owned 

subsidiary. 

As of today Groupe Caisse d’Epargne (a savings bank network) is the third-largest 

banking group in France with some 26 million clients and 4,770 branches. The central 

body of the group is Caisse Nationale des Caisses d’Epargne (CNCE) who owns 75% of 

Crédit Foncier de France. The Nexity group (a real estate operator partly owned by 

Groupe Caisse d’Epargne) owns the other 25% of Crédit Foncier de France. Groupe 

Caisse d’Epargne is involved in retail banking, insurance, real estate development as well 

as corporate and investment banking via the 34% ownership of Natixis. With effect 3 

August 2009 the central bodies of Groupe Banque Populaire and Groupe Caisse 

d’Epargne, CNCE and BFBP merged into BPCE, forming France’s second largest 

banking group, see more in issuer profile on BPCE. According to Fitch this merger does 

not have any rating impact on covered bonds issued by CFF. 

CFF is a leading specialised real estate finance institution in France. Although well 

recognised, CFF’s domestic franchise is suffering from declining market share in retail 

mortgage lending. At end-2008 market share stood at 5.6%, down from 7.2% at end- 

2004. Yet, CFF's franchise has been supported in recent years by a number of legal 

mergers. 


The 2008-numbers was heavily impacted by poor performance in the investment banking 

unit Natixis due to the exposure to CDOs and monoliners. Hence, for the first time since 

1999 both GCE and BP recorded a full-year loss in operating profit mainly driven by a 

negative impact from Natixis. An AFS reclassification on EUR18bn only made a positive 

contribution of EUR0.3bn in profits and Natixis still carries a EUR60bn portfolio of 

troubled or illiquid assets, according to Fitch. On the bright side, all other business areas 

besides Natixis recorded positive results (although all significant areas were down 

compared with 2007). Of the operating income approx. 79% stemmed from domestic 

retail banking (primarily commercial). 



Issuer rating 

Aa3/A+/AA- 




Moodys TPI - 




Table 29. Financial information BPCE 

EURm 2008 2007 




Pre-provision income 548 3,017 


Operating profit -2,614 2,197 

NPL 








CFF, CDEE, BPCOV 

Website 

Foncier.fr 

groupe.caisse-epargne.com 

banquepopulaire.fr 


Chief Analyst 


+45 45 12 80 43 



CFF 


As an issuer of ObF under supervision of the French FSA, CFF is operating according to 

specialist banking principles meaning the sole purpose of CFF is to fund mortgages, 

public loans and substitution assets by issuance of ObFs. This is the reason why the cover 

pool which stands at EUR96bn (at end-2008) is funded by the issuance of EUR80bn 

covered bonds. In 2008 CFF’s covered bond issuances totalled EUR8.5bn down from 

EUR23.5bn in 2007. Some of this was pre-funding of 2008 which explains the relative 

low issuance in 2008: Year-to-date CFF has issued EUR3.6bn of covered bonds (seven 

months of 2009) mainly through taps in EUR and CHF. In May 2009, CFF issued a 

benchmark covered bond (12y) of EUR1.25bn. 

The mortgages funded by CFF are provided by the domestic branch network of Crédit 

Foncier de France (200 branches), the banking network of Groupe Caisse d’Epargne 

(4,770 branches) and referrals from real estate professionals. Recently, CNCE has set up a 

special covered bond vehicle with the sole purpose to issue common-law covered bonds a 

la BNP, Banque Populaire, CM-CIC and Credit Agricole. The primary reason for this 

new set-up is the increasing share of guaranteed home loans, which are only ObF-eligible 

to a maximum limit of 35%. 

CFF is only exposed to a minimum of market risk as all assets and liabilities are swapped 

into euro floating rates. We believe the only risks to be concerned about are refinancing 

risk and prepayment risk. As of today (end 2008) the average maturity mismatch between 

assets and liabilities is 0.9 years. However, the liquidity gaps for CFF are limited by its 

internal rules stating that the issuer cannot have liquidity shortfall in the following 24 

months on a rolling basis. Further, CFF is obliged to maintain sufficient short-term 

liquidity to cover its privileged debt commitments for a period of one year under the 

unlikely situation wherein no early repayment would accelerate borrowers’ repayments. 

Table 31. Funding profile 

Total balance 

Covered bonds 

Other preferred debt 

Unsecured debt 

Subordinated debt 

Equity 


EUR 96bn 

80bn 

3bn 

7bn 

4bn 

1bn 


The cover pool currently (as of end-2008) stands at EUR96bn and consists of public 

sector loans (54%), residential prime mortgages (34%) and substitution assets (13%). The 

geographical distribution of the cover pool is as follows; France (64%), Italy (9%), Spain 

(8%), the Netherlands (5%), the US (5%), Germany (2%) and others (7%). 

CFF benefits from sound asset quality. At end-2008 doubtful loans in the private sector 

(excluding loans with a state guarantee) comprised only 0.3% of the total (including 

securitisation tranches), close to the industry average of about 0.9%. 

The current weighted average LTV of the pool is as low as 53.4% which is well below the 

LTV-limit of 75% for residential mortgages. The O/C (over-collateralisation) for the 

cover pool stood at 10.8% end-2008. 

Moody’s/S&P/Fitch have all assigned triple-A ratings to the covered bond programme. 


Cover pool 

EUR 96bn 

Mortgage loans 

32bn 

Public loans 

52bn 

Other assets and securities 

12bn 

O/C 11% 

Average LTV 53% 

Geographical exposure 

France 64% 

Italy 9% 

Spain 8% 

Netherlands 5% 

Other 14% 


32 | 10 September 2009 







Crédit Immobilier de France (CIF) is a leading institution fully specialised in residential 

mortgages in France. The long history (dates back to 1908) has allowed CIF to develop a 

unique range of personalised products for its target clientele of middle-income buyers. Its 

distribution network is made up with 300 points of sales, through 19 operational 

subsidiaries managed by the holding company Crédit Immobilier de France Development 

(CIFD). 

CIF Euromortgage (CIFEUR), a 100%-owned subsidiary of CIFD, was created in 2000 

and is accredited as a Société de Crédit Foncier (SCF) with the sole purpose of issuing 

ObF. 

The mortgage loans funded by CIFEUR are provided by Crédit Immobilier de France 

Développement (CIFD) who is a specialised lender in France and had a market share of 

about 5.3% of the French housing market in 2008 as well as Banque Patrimoine et 

Immobilier (BPI). 


CIFD has not yet announced the full-year results for 2008, hence we are only able to 

present the financial performance back to 2007. CIFD’s net interest income decreased to 

EUR377m in 2007 down from EUR384bn in 2006. A trading gain on the securities 

portfolio in 2006 of EUR8m was reduced to a loss of EUR9m in 2007. 

Regarding asset quality, the NPL ratio has been quite stable around 1.3% for several 

years. The tier 1 ratio stands at 14%, which like the NPL ratio has been stable for several 

years. 



Aaa/-/AAA 

Issuer rating 

A1/A/A+ 




Moodys TPI - 





EURm 2007 2006 

Net interest income 377 384 

Fees & commissions 67 65 

Net gain/losses -9 8 

Pre-provision income 

Losses & provisions 10 4 

Operating profit 127 163 

NPL 1.3% 1.2% 



Core capital ratio 13% 13% 

Total capital ratio 14% 14% 


In its latest report on CIFD (October 2008) Fitch argues that CIFD plays an important 

role in the French market for housing finance; hence Fitch believes there is a high 

probability that CIFD would be supported by the French authorities if needed. 


As an issuer of ObF under supervision of the French FSA, CIFEUR operates according to 

specialist banking principles – meaning the sole purpose of CIFEUR is to fund mortgages 

and substitution assets by issuance of ObFs. This is the reason why the cover pool, which 

stands at EUR19.6bn (in Q1 2009), is funded by issuance of EUR18.8bn covered bonds. 

In 2008 CIFEUR covered bond issuances totalled EUR1.4bn and EUR1.7bn in private 

placements. Year-to-date, CIFEUR has been able to issue one 5y bench mark covered 

bond issuance of EUR2.0bn (seven months of 2009). 



Website 


CIF 

cif-euromortgage.com 

Chief Analyst 


+45 45 12 80 43 




The group has set up an internal process of securitising the loans granted by its 

subsidiaries. The loans are purchased by two internal SPVs (CIF Assets and BPI Master 

Mortgage). These SPVs issue AAA rated units and subordinated units rated A2. The 

subsidiaries repurchase the subordinated units to keep the customer risk, and CIFEUR 

purchases only the AAA/Aaa units. 

To qualify as an eligible asset for an SCF, the securitisation debt must be backed by at 

least 90% of eligible loans, as defined by the law. They must be senior units issued by 

either an FCC or a similar entity incorporated under the laws of countries in the European 

Economic Area (EEA) and ECC. In the case of CIFEUR the two major FCCs supplying 

eligible assets to the cover pool are CIF Assets and BPI Master Mortgage. 

CIFEUR is only exposed to a minimum of market risk, as all assets and liabilities are 

swapped into euro floating rates. The only risks to be concerned about is refinancing risk 

and prepayment risk. As of today (Q1 2009) the average maturity mismatch between 

assets and liabilities is 1.6 year. However, the liquidity gaps for CIFEUR are limited by 

its internal rules stating that the issuer cannot have liquidity shortfall in the following 24 

months on a rolling basis. 

The business model based on the inclusion of asset-backed securities up to 100% of the 

cover pool is not in compliance with CRD. It is worth noting that the limit of 20% MBS 

tranches in the cover pool stated in CRD is not in effect in France. This regulation is 

deferred until end-2010 and it is to be renegotiated before it becomes effective. 


Total balance 


Other debt 


Equity 


EUR 19.7bn 

18.8bn 

0.3bn 

0.4bn 

0.2bn 


The cover pool currently (end 2008) stands at EUR17.3bn and consists of securitisation of 

loans granted by the CIFD Group (EUR13.6bn, 79%), other AAA-tranches of European 

RMBS (EUR1.9bn, 11%), mortgage promissory notes (Billets Hypothécaires) 

(EUR1.8bn, 10%) and replacement assets (EUR1.9bn, 11%). The geographical 

distribution of the cover pool is as follows; France (90%), Spain (5%), Italy (4%) and 

others (1%). 

Since May 2007, according to French law Billets Hypothécaires (BHs) are eligible for 

ObF funding for up to 10% of total assets. CIFD group has decided to use this resource as 

a way of refinancing residential loans that are not yet securitised. The BHs are issued by 

the regional banks of the CIFD group and secured on a pool of residential loans 

(mortgage loans and, for up to 35% of the total, loans guaranteed by an eligible financial 

institution or insurance company such as Crédit Logement) with an O/C of 25%. The 

repayment of the BHs is guaranteed by 3CIF (a member of the CIF group). The guarantee 

is such that 3CIF will pay the BHs immediately should a local bank fail to do so. 


Cover pool 

EUR 17bn 

Senior units from CIF/BPI 

14bn 

Mortgage notes 

2bn 

European RMBS 

2bn 

O/C 2% 

O/C incl. RMBS O/C 14% 


France 90% 

Italy 4% 

Spain 5% 

Netherlands 1% 

Other 0% 


Regarding the AAA-tranches of European RMBS, these portfolios do not contain any 

exposure to the US or to the subprime markets. No RMBS tranches acquired by CIFEUR 

have ever been downgraded. The securitisation tranches include 77% first ranking 

mortgages, 10% mortgages supported by state guarantee and 13% guaranteed housing 

loans. 82% of the properties are first residence, 16% is buy-to-let and 2% is secondary 

housing. 

The current weighted average LTV of the pool is 64% on the CIF Asset portfolio and 

47% on the BPI Master Mortgage portfolio which is well below the LTV-limit of 75% for 

residential mortgages. The average seasoning of the cover pool is above 48 months. The 

O/C (over-collateralisation) for the cover pool stood at 2% in Q1 2009. 

Moody’s and Fitch have both assigned triple-A ratings to the covered bond programme. 

34 | 10 September 2009 




CM-CIC 



The issuer CM-CIC Covered Bond (CMCICB) is a French credit institution with limited 

purpose and is subject to French banking authorities (but not subject to covered bond 

legislation in France). CMCICB is a 99.9%-owned subsidiary of Banque Fédérative du 

Crédit Mutuel (BFCM). CMCICB serves as a pure funding vehicle, thus there is no 

personnel at CMCICB and all administration, etc. is subcontracted to BFCM. Covered 

bond investors have full recourse to BFCM in the event of default. BFCM is the holding 

and financing entity of Crédit Mutuel Centre Est Europe (CMCEE). Besides acting as a 

financing vehicle, BFCM also manages liquidity and coordinates CMCEE’s subsidiaries, 

of which the most prominent in a covered bond context is the CIC-group (CIC). CIC was 

purchased in 1998 and consists of six regional banks with 2,122 branches. It is the entities 

in CMCEE and CIC that provide the collateral for covered bond issuance 

CMCEE is a French cooperative banking group with 709 member banks (total branches 

1,393), which has put in place a federal bank, Caisse Federale du Credit Mutuel Centre 

Est Europe. CMCEE (including CIC) is a major player in French retail banking, with 

deposit and loan market shares of 7.7% and 11.4%. respectively (2007 figures). In 2008, 

CMCEE acquired Citibank Germany (a network of 339 agencies, 6,092 employees and 

3.4 million customers, specialised in consumer loans – balance EUR10.8bn) and 

concluded an agreement for the control (in 2009) of Cofidis, the consumer loan subsidiary 

of 3 Suisses International. After the inclusion of CM Midi-Atlantique as of January 1, 

2009, CMCEE now covers five regional federations and is a sub-section of the Credit 

Mutuel Group (composed of 18 regional federations). 

The group is well capitalised with a tier 1 ratio of 8.6% year-end 2008 (9.6% on 1 

January 2009 owing to the progressive removal of the ceiling on the Basel II ratio). 


CMCEE’s consolidated financial result for 2008 was heavily affected by the financial 

crisis with operating profit (excluding CM Midi-Atlantique) down to EUR344m from 

EUR2,892m in 2007. Of the net banking income of EUR5,795m, which was realised in 

2008, 78% stems from domestic operations and 84% relates to the core business, retail 

banking and insurance. As for the main subsidiary BFCM (which covered bond investors 

ultimately have full recourse to) net income was down to EUR29m from EUR1,464m in 

2007. The poor performance was due to significant impairments related to the securities 

portfolio and rise in cost of risk (both retail and market activities). Cost of risk in CMCEE 

increased to EUR1,064m in 2008, including EUR484m related to the bankruptcy of 

Lehman Brothers and EUR65m related to the Icelandic banks. However, by reclassifying 

a large part of its securities under IAS39 both CMCEE and BFCM avoided recording a 

net loss for the year. 

Table 38. Rating 

Covered bond rating: Aaa/AAA/AAA 

Issuer rating (parent) Aa3/A+/AA- 

Fitch D-factor: 19.8% 

Fitch supporting =/C 12.7% 

Moodys C-score: 5.7% 

Moodys TPI: 

Probable 

S&P Category: 

3 (expected) 




EURm 2008 2007 



Net gain/losses 492 5,614 



Operating profit 344 2,892 

NPL 3.2% 2.4% 

Loan loss coverage 72% 61% 

Cost/income ratio - - 






Website 




+45 45 12 85 65 


CMCICB 

bfcm.creditmutuel.fr 


CM-CIC 


Given the retail-oriented focus of CMCEE the majority of funding stems from retail 

deposits. Of the total wholesale funding of EUR115bn 54% is short term (primarily 

certificates of deposits, commercial paper) and 46% medium- to long-term. The latter 

primarily consist of senior unsecured debt (45%) and covered bonds (20%), but CMCEE 

has also received funding from SFEF (17%). 

The covered bonds will be direct, unsecured and unsubordinated obligations of CMCICB 

(the issuer, a 99.9%-owned subsidiary of BFCM), a French credit institution with limited 

purpose (similar to the UK ‘LLP’). The proceeds from the covered bond sale will be lent 

to BFCM pursuant to the terms of a “Borrower facility” agreement. The terms of the loan 

are identical to the covered bond. As long as BFCM is solvent, it will manage all cash 

transactions and the day-to-day management of the issuer including servicing of the 

covered bonds and the debt between the bank and the issuer, and the performance of the 

obligations and the issuer's regulatory duties. Prior to a default of BFCM, the collateral is 

on the balance sheet of the individual entities in CMCEE. 


Total balance 

EUR441bn 

Deposits 43% 


Financial liabilities and deriv.. 13% 

Others 17% 

Equity 4% 


Moody’s notes that “the cohesiveness and centralisation within a grouping of federations 

such as CM4-CIC is at least as strong – and in many instances stronger – than in the other 

French mutualist groups” (after the inclusion of CM Midi-Atlantique the group is now 

referred to as CM5-CIC group). Moody’s furthermore notes that although BFCM is not 

part of the cross-guarantee system within the mutualist group, it “estimates the probability 

of support for it as very high, taking into consideration its liquidity management and 

funding role within the CM4-CIC group” 


The cover pool currently (as of May 2009) stands at EUR20bn (238,077 loans of which 

none are in arrears) and is made up of 43% French first-lien residential mortgage loans 

and 57% residential loans with a guarantee. With bonds issued worth EUR14.2bn this 

equals an O/C (overcollateralisation) of 43%. CMCICB has committed to maintain a 

8.1% O/C at all times and according to Moody’s, an O/C of only 3% is required to 

maintain the current rating. Should BFCM be downgraded one notch, Moody’s requires 

an O/C of 7%, hence well below the current level as well within the committed level. 

Note, CMCICB only allows French collateral and the currency of the loans granted is 

limited to euro and Swiss franc. The vast majority of properties are owner occupied 

(84%), but the cover pool also includes buy-to-let (14%) and second homes (2%). As for 

geography there is overweight in the eastern part of France due to the location of the 

entities in CMCEE, but otherwise the cover pool is well diversified. CMCEE’s overall 

loan book in general is very sound although impaired loans have risen to 3.1% of gross 

loans at end-2008 (from 2.2% year-end 2007) and these were 71.6% covered by reserves. 


Cover pool 

EUR 20bn 

Current O/C (committed) 43% (8.1%) 


WA LTV 69% 


Seasoning 

43 months 

NPL 0% 


Geography 

Only France 



Asset type 





- Other 0% 


36 | 10 September 2009 







The cooperative banking group Crédit Agricole (ACA) is the largest high-street bank in 

France, with 39 regional banks spread throughout the whole of France. Together the 

regional banks have long-term control over most of Crédit Agricole S.A.’s (the central 

body of mutual Credit Agricole network) capital via SAS Rue la Boétie (55.2% of total 

shares as of 30 June 2009). Through a joint and several guarantee the regional banks 

guarantee all obligations of Credit Agricole S.A. to third parties and cross-guarantee 

themselves. Through these mutual support mechanisms, bondholders of ACA are 

ultimately protected by the regional banks’ entire capital cushion. It is Credit Agricole 

S.A. covered bond holders ultimately have recourse to. 

With the acquisition of Crédit Lyonnais (LCL) in 2003, the banking group strengthened 

its positions in all business areas. The retail market share of deposits is 29%. 2,573 local 

banks form the backbone of the banking group’s mutual organisation. The banking group 

serves more than 26 million customers through more than 9,000 branches. ACA also 

holds a strong position in retail banking in Europe, primarily Italy and Greece and to a 

lesser extent in Portugal, CEE (incl. Ukraine), Africa and Latin America. In terms of 

credit risk, France is naturally the largest exposure (62%), followed by other western 

Europe (17%). Eastern Europe only constitutes 1.5%. The banking group furthermore has 

a leading position within consumer finance and other specialised financial services – life 

and non-life insurance, asset management and private banking. The investment bank, 

Calyon, is also member of the banking group. 

The banking group in 2008 set up Crédit Agricole Covered Bonds (ACACB), a French 

credit institution with limited purpose, subject to French banking authorities (but not 

subject to the covered bond legislation in France). First issue from the entity was 

executed in January 2009. 

ACA is well capitalised with core Tier 1 ratio of 8.4%, up from 7.4% in 2007. 


The 2008 results for ACA were heavily impacted by the negative result in the investment 

bank unit Calyon, which was heavily exposed to the US subprime sector through CDOs 

and monoliners. The poor performance has led management to reduce the risk profile of 

Clayon significantly. Furthermore, the deterioration in the overall macroeconomic 

situation in ACA’s core markets has prompted significantly loan loss provisioning, 

especially in Greece. However, the share of NPLs still remains below the French average. 

On the plus side, the core business, i.e. retail banking, generates increasing income as net 

interest income was up EUR4bn y/y. As many other European banks, ACA reclassified 

the balance sheet (EUR12bn), which lifted the income by some EUR500m in 2008. 



Issuer rating 

Aa1n/AA-n/AA- 


Fitch supporting O(C 10.9% 


Moodys TPI 

Probable 





EURm 2008 2007 







NPL 2.9% 2.6% 

Loan loss coverage 57% 

Cost/income ratio 62% 62% 






Website 


ACACB 

credit-agricole.com 



+45 45 12 85 65 





Due to strong focus on retail banking the majority of ACA’s funding base stems from 

deposits, but the group also has wide access to capital markets through securitisation. 

Since 2004, the ratio of customer deposits to total funding base has been under pressure, 

but ACA managed to increase the ratio to 62% end-2008 from 48% in 2006. As other 

major French banks, ACA has access to funding through SFEF (the French agency 

created as part of the French support scheme for banks). ACA’s long and medium term 

target for 2009 is EUR30bn (of which 68% was completed in May 2009). ACA enjoys a 

very strong liquidity position with more than EUR100bn repo-able assets year-end 2008. 

Currently only 10% of the repo potential is utilised. According to Fitch ACA has granted 

a total of EUR18bn liquidity lines to four conduits (with EUR15bn of underlying assets at 

end‐2008). However, no liquidity line has been used and none of the conduits is 

experiencing funding difficulties that would require a consolidation by ACA, according to 

Fitch. 


Total balance 

EUR 1,784bn 

Deposits 62% 

Interbank borrowings 15% 

Market funding 16% 

- of which covered bonds 

Equity 7% 


ACA has chosen to set up a common-law covered bond programme instead of using the 

existing legal framework that regulates the issuance of Obligations Foncieres (ObF), even 

though the current cover pool composition complies with the ObF-legislation (contrary to 

most other common-law issuers). It is our understanding that ACA intends to mirror the 

ObF going forward, hence keeping a share of guaranteed loans below 35%. 


As of 30 May 2009, the cover pool was EUR6.1bn. The total programme constitutes 

EUR35bn and these numbers should be viewed in context with a total home-loan business 

in ACA of EUR227bn, hence the cover bond programme potential only constitutes 15% 

of the total loan book which is the lowest ratio among French banks. The cover pool 

consists entirely of self-originated French residential home loans, mainly owner-occupied 

(84%), but also buy-to-let (12%) and second homes (4%). No substitution assets are 

included in the cover pool. 54% of the cover pool are traditional mortgage loans, 13% are 

mortgage loans with an additional state guarantee (PAS-loans) while the remaining 33% 

are guaranteed loans. Of the guaranteed loans, the majority (76%) enjoys a guarantee 

from Crédit Logement, while the remainder is guaranteed by the in-house guarantor, 

CAMCA (see separate description). Due to the extensive branch network throughout 

France the geographical diversification is very high. 

As of 30 May 2009 O/C was 122%. There are no NPLs in the cover pool. For ACA as a 

whole, impaired loans at year-end 2008 constituted 2.9% of total loans and receivables. 


Cover pool 

EUR 6.1bn 

Current O/C 

122% (8.1%) 

(committed) 

Average loan size EUR 54,750- 

WA LTV 65% 


Seasoning 

50 months 

NPL 0% 


Geography 

Only France 



Asset type 





- Other 0% 


38 | 10 September 2009 




CRH 

Legal-based covered bonds 


Caisse de Refinancement de l'Habitat (CRH), a credit institution, plays a special role in 

the financing of housing in France. The CRH was set up in 1985 as part of the general 

reform of mortgage markets decided by the French government and so received the 

special agreement of the Act dated July 11, 1985 (article 13). Its sole object is to 

refinance housing purchasers’ loans, granted by the credit institutions which are its 

shareholders. Every borrower is committed to become shareholder of CRH with a part in 

CRH’s equity equal to the part of its borrowings in CRH’s global loan amount. The 

current breakdown of shareholders is (as of June 2009): 

• Credit Agricole SA – Credit Lyonnaise 40% 

• Credit Mutuel – CIC 33% 

• Societe Generale 13% 

• BNP Paribas 9% 

• Banque Populaires 5% 

• Others 1% 

The sole object of CRH is to refinance housing purchasers’ loans, granted by the credit 

institutions which are its shareholders, by issuing bonds governed by French law. 

Refinanced loans are all first mortgages loans or residential guaranteed loans provided 

these meet strict standards of security. All the loans comply with the criteria defined by 

the law as well as those defined by CRH. CRH funds only housing loans. Therefore, 

securitisation funds and RMBS are excluded from CRH’s cover pool. 



Aaa/-/AAA 

Issuer rating -/-/- 




Moodys TPI - 





2008 2007 

Net interest income 8.0 5.7 

Fees & commissions 

Net gain/losses 

Pre-provision income 

Losses & provisions 

Operating profit 6.1 4.0 

NPL 




Total capital ratio 8.7 8.8 


Its loans are matched by bond issues and secured by a pledged loans portfolio (billets de 

mobilisation) equal to 125% of the amount borrowed as regulated by the law. As a result, 

CRH acquires ownership of the loan portfolio in the event of a borrower’s default, 

without further formality and notwithstanding any provisions to the contrary. In such an 

event, CRH may also call on the borrowing banks to provide cash up to 5% of its 

outstanding loans. Apart from the special supervisory duties of the Commission Bancaire, 

defined by the law, CRH’s audit department makes regular inspections at borrowing 

banks, with sample tests to confirm the soundness and proper form of the pledged loans. 

Since its founding in 1985, CRH has issued bonds totalling EUR40bn, of which EUR6bn 

are guaranteed by the French government. No other agency of this type has been created 

in France. 

CRH has a total capital ratio of 8.7%. 



Website 


CRH 

crh-bonds.com 

Chief Analyst 


+45 45 12 80 43 



CRH 


CRH is run, more or less, as a non-profit organisation as all profit is returned to the 

shareholder banks. Net interest income has been increasing for the past couple of years to 

EUR8.0m in 2008 up from EUR1.8m in 2004. In the same period of time net income has 

increased to EUR3.8m in 2008 up from EUR0.3m in 2004. The assets totalled 

EUR38.5bn in 2008 up from EUR17.5bn in 2004. As mentioned earlier, due to the 

specialist banking principles prevailing in France, almost all assets are funded by issuance 

of covered bonds. 

As mentioned no problem loans are eligible for CRH’s asset portfolio. 


As an issuer of CRH covered bonds under supervision of Commission Bancaire, CRH is 

operating according to a specialist banking principle meaning the sole purpose of CRH is 

to fund mortgages by issuance of CRH covered bonds. This is the reason why the cover 

pool which stands at close to EUR56bn (at end-2008) is funded by issuance of EUR38bn 

CRH covered bonds. In 2008 CRH’s covered bond issuances totalled EUR7.4bn and 

despite the turmoil in the financial markets CRH has been able to issue year-to-date 

EUR1.5bn of covered bonds (seven months of 2009). 

The mortgages funded by CRH are provided by the domestic branch network of the 

shareholder banks. All the shareholder banks issue ObF or contractual covered bonds on 

their own. 


Total balance 

EUR 38bn 


38bn 


0,2bn 

Equity 

0.2bn 


The lending procedure toward the shareholder banks is as follows: CRH receives 

applications for refinancing from its participating banks on a regular basis. After 

accepting or limiting these requests and establishing projected financing requirements, 

CRH launches a bond issue on the financial market. CRH lends all the proceeds of the 

issue to the borrowing banks at the same rates and maturities, without charging a margin 

or fees. CRH loans take the form of promissory notes issued by the borrowing banks. 

These promissory notes carry the same terms as the CRH bonds. Then, the funds required 

to service CRH’s debt are provided in full by the borrowing banks at the bond’s maturity 

dates. 

CRH is only exposed to a minimum of market risk and contrary to ObF issuers CRH is 

not exposed to any prepayment risk. Further, the average maturity mismatch between 

assets and liabilities is close to zero. 


The cover pool currently (as of end-2008) stands at close to EUR56bn and consists of 

100% residential prime mortgages backed by 100% French properties and to some extent 

guaranteed home loans (no more than 35% of the cover pool). Eligible collateral makes 

up EUR51bn. CRH is bound by the same LTV-limits as ObF. CRH benefits from very 

sound asset quality whereas only mortgages not in arrears are eligible for the cover pool. 

Further the mandatory O/C of 25% is outstanding (50% for floating rate loans). The 

current O/C (December 2008) is 34% (47% including non-eligible collateral). The current 

weighted average LTV of the pool is as low as 55%. Unfortunately CRH does not 

disclose any further details on the cover pool. 

Moody’s and Fitch have both assigned triple-A ratings to the covered bond programme. 


Eligible loans 

51bn 

Non-eligible loans 

5bn 

O/C 25% 

O/C (incl. non eligible 

32% 

loans) 

NPL 


40 | 10 September 2009 







The Dexia Group dates back to 1996 from the alliance of two top-level operators in local 

public sector financing in Europe; Crédit Communal de Belgique and Crédit Local de 

France. It was the result of one of the very first cross-border mergers in the European 

banking sector and is classified among the twenty largest financial institutions in the 

eurozone. It builds its strategy on two pillars: retail banking in Europe (Belgium, 

Luxembourg, Slovakia, Turkey); and a world leadership in financial services to the local 

public sector and project finance. 

Dexia is a retail bank which has 5.5 million customers in Belgium, Luxembourg, Slovakia 

and Turkey. Dexia Bank SA and Dexia Banque Internationale à Luxembourg are among 

the three largest banks in Belgium and Luxembourg, respectively. In Belgium the client 

base includes 4.1 million retail clients (17% market share). The Turkish member of the 

group is DenizBank with 2.4 million clients. 

The financial crisis has affected DEXMA in different ways through fair value changes, 

impairment and losses, which required significant backing from national governments 

and the company’s shareholders. There was a capital increase of EUR6bn (announced on 

September 30, 2008, and subscribed by the Belgian and French States as well as by 

DEXMA’s main shareholders), as well as a guarantee of the States for the liabilities of the 

Group and the assets in FSA’s Financial Products portfolio. 

Dexia enjoys a dominant position in European local government funding and operates 

FSA, one of the four leading US-based municipal bond insurers. Although FSA does not 

have exposure to the worst-hit structured credit segment, CDOs of ABS, it has insured 

USD16bn on nonprime US mortgage-related products (DEXMA is reducing its shares in 

FSA to below 25%). Besides, DEXMA also holds six issues of large French and Spanish 

local governments with credit enhancement by monoline insurer (EUR79m). 

Dexia Municipal Agency (DEXMA) is a wholly-owned subsidiary of Dexia Crédit Local 

and is accredited as a Société de Crédit Foncier. 



Issuer rating 

A1/A/A+ 




Moodys TPI 

Probable high 





EURm 2008 2007 

Net interest income 225 201 

Fees & commissions -5 -4 

Net gain/losses 3 1 

Pre-provision income 162 102 


Operating profit 162 120 

NPL 0% 0% 








Website 


DEXMA 

dexia-ma.com 


As opposed to a number of DEXMA’s French peers net interest income has been 

increasing for the past couple of years to EUR225m in 2008 from EUR154m in 2004. In 

the same period net income has increased to EUR113bn in 2008 from EUR61bn in 2004. 

In the same period assets have been increasing as well, totalling EUR87bn in 2008 up 

from EUR50bn in 2004. As mentioned earlier, due to the specialist banking principle 

prevailing in France almost all of the assets are funded by issuance of ObF. 

The cost/income ratio has showed an impressive downward trend to 36% in 2008 down 

from 40% in 2004. Taken together these trends have improved ROE. By the end of 2008 

ROE stood at 10.3% up from 8.9% in 2004. The asset quality is high and the 

problem/gross loans ratio has stood at 0.0% for several years. 

Chief Analyst 


+45 45 12 80 43 





As an issuer of ObF under supervision of the French FSA, DEXMA is operating 

according to specialist banking principles – meaning the sole purpose of DEXMA is to 

fund public loans and substitution assets by issuance of ObFs. This is the reason why the 

cover pool which stand at EUR62.9bn (at end-2007) is funded by issuance of EUR56.4bn 

covered bonds. In 2008 Dexia MA’s covered bond issuances totalled EUR10bn, yet due 

to the turmoil in the financial markets EUR 8.7bn hereof was issued in H1 2008. In 2009 

Dexia MA has been able to issue two benchmark issues of EUR3.5bn of covered bonds 

(in the first seven months of 2009). 


Total balance 

EUR 87bn 

Covered bonds 60 

Other preferred debt 1 

Debt to DCL 10 

Debt to BoF 2 

Equity 1 


The public loans funded by DEXMA are provided by Crédit Local de France. 

Traditionally, the public loans business was solely anchored in the French market, yet 

recently the business area has expanded to include public loans in Austria and Italy. 

DEXMA is only exposed to a minimum of market risk as all assets and liabilities are 

swapped into euro floating rates. We believe the only risks to be concerned about are 

refinancing risk and prepayment risk. As of Q1 09 the average maturity mismatch 

between assets and liabilities is 2.9 years. 


The cover pool currently (as of Q1 2009) stands at EUR71.3bn and consists of EUR54bn 

public loans and EUR20.5bn other securities. The geographical distribution of the cover 

pool is as follows; France (65%), Italy (10%), Switzerland (6%) and others (19%). 

DEXMA has decided to maintain a minimum O/C of 5%, which is considered a safe 

margin. In practice, the O/C is generally well above 10%, but it declined significantly in 

the beginning of September 2008. Since then, DEXMA has pledged certain assets to 

obtain financing from the BoF. These assets are therefore excluded from the calculation 

of the O/C. Indeed, realizing the absence of transactions in the covered bond market and 

the impossibility to produce new issues, Dexia MA decided to temporarily finance a large 

part of its surplus overcollateral (beyond 105%) with funding from the BoF. 

DEXMA benefits from sound asset quality. At end-2008 mortgages with more than three 

months’ arrears comprised only 0.0% of the total, well below the industry average of 

approximately 0.9%. 


Cover pool 

EUR 71bn 

Public loans 

54bn 


20bn 

Assets pledged for BoF 

-3bn 

O/C 8.5% 

Average LTV 


France 65% 

Italy 10% 

Switzerland 6% 

Belgium 6% 

Spain 5% 

Other 8% 


Moody’s/S&P/Fitch have all assigned triple-A ratings to the covered bond programme. 

42 | 10 September 2009 







General Electric SCF (GE SCF), a Société de Crédit Foncier (SCF) with the sole purpose 

of issuing ObF, is 99.9% owned by GE Money Bank that specialises in lending to private 

individuals. The US Group GE has selected its French subsidiary GE Money Bank for its 

entry into the covered bond market. GE SCF is a lending institution governed by French 

law and under supervision of the French FSA. 

GE SCF was accredited by the CECEI as a SCF in July 2009, thereby becoming the 12th 

active issuer in the French covered bond market and the first foreign group to issue ObF. 

GE SCF benefits from the credit strength of General Electric Capital (GECC) rated 

Aa2/AA+ by Moody’s/S&P who acts as sponsor bank guarantor. GECC will guarantee 

certain payment obligations of its subsidiary, GE Money Bank. 

GE Money, also known as GE Consumer Finance, was established in 1930 as part of the 

GE Group and is today the personal finance provider for more than 130 million clients 

worldwide. With a global presence across 55 countries, GE Money has a history of 

providing financial solutions to consumers as well as businesses and brokers. 


GECC’s net interest income was reduced to USD7,464m in 2008 from USD8,248m in 

2007 and trading income was almost halved and stood at USD963m compared to 

USD1,759m in 2007. An income tax benefit of USD2.3bn in 2008 compared to an 

income tax expense of USD700m in 2007 supported 2008 earnings. In line with other 

financials GECC faced increasing provisioning in 2008; USD7.5bn up from USD4.5bn in 

2007. These trends have put pressure on ROE, which at the end of 2008 stood at 12.2% 

down from 19.5% in 2006. 

In March 2009 GECC (Aa2/AA+) lost its long-term triple A-ratings from both Moody’s 

and S&P. The reason for the downgrades was concern regarding earnings volatility due to 

deteriorating asset quality as well as heavy reliance on wholesale funding. Heavy reliance 

on wholesale funding made the financial industry as a whole vulnerable during the 

financial crisis and consequently GECC has benefitted from the FDIC government 

guarantee set-up under which it has issued more than USD50bn (equivalent) of bonds. 



Aaa/AAA/- 

Sponsor guarantor rating Aa2/AA+/ - 




Moodys TPI 

Probable 





USDm 2008 2007 



Net gain/losses 963 1,759 




NPL 2.0% 1.3% 








Website 


GESCF 

gemoney.com 

Chief Analyst 


+45 45 12 80 43 





As an issuer of ObF under supervision of the French FSA, GE SCF is operating according 

to specialist banking principles meaning the sole purpose of GE SCF is to fund 

mortgages, public loans and substitution assets by issuance of ObFs. This is the reason 

why the cover pool which stands at EUR1.4bn is so far funded by the issuance of 

EUR1bn covered bonds. In July 2009 GE SCF made its inaugural covered bond 

benchmark issuance with a maturity of 5y. 

The residential mortgages and guaranteed home loans funded by GE SCF are provided by 

the domestic branch network of GE Money Bank (31 branches). The share of guaranteed 

home loans which are only ObF-eligible to a maximum limit of 35% is guaranteed by 

Compagnie Européenne de Garanties et Cautions (CEGC former known as SACCEF) 

which is owned by Natixis which is owned by Banque Populaire and Caisses d’Epargne. 

GE SCF is only exposed to a minimum of market risk as all assets and liabilities are in 

euro and any future currency mismatch is expected to be hedged. Yet, so far there is no 

hedging agreement in place between GE SCF and the sponsor bank regarding interest rate 

risk (all assets are floating rate loans whereas all liabilities are fixed rate bonds). 

GE SCF has mitigated any liquidity risk by committing itself to a mandatory minimum 

O/C of 5%. 


Total balance 

Short term debt 

Long term debt 

Equity 


USD637bn 

258bn 

252bn 

58bn 


The cover pool currently (as of mid-2008) stands at EUR1.4bn and consists of 100% 

residential assets (approximately 70% mortgages and 30% guaranteed home loans). The 

geographical distribution of the cover pool is as follows; Ile-de-France (33%), Provence- 

Alpes-Côte-d’Azur (19%), Nord-Pas-de-Calais (8%), Rhône-Alpes (8%). 

GE SCF benefits from sound asset quality. There are no non-performing loans in the 

cover pool and the assets are well seasoned (48m). On the other hand, all assets are 

floating rate loans and more than one third of the cover pool comprises loans to secondary 

housing or buy-to-let housing. 

The current indexed average LTV of the pool is 74%, which is above industry average in 

France. The O/C (over-collateralisation) for the cover pool is as high as 40% due to the 

fact that only one covered bond issuance has been done. The O/C will decline in line with 

new covered bond issuances (yet it cannot go below 5%). 


Cover pool 

EUR 1.4bn 

Residential assets 

1.4bn 

Public loans 

0.0bn 


0.0bn 

O/C 40% 

Average indexed LTV 74% 

Average seasoning 

48m 

IO-loans 0% 

Floating rate loans 100% 

Secondary housing 25% 

Buy-to-let housing 10% 

Loans in arrear 0% 


Moody’s and S&P have assigned triple-A ratings to the covered bond programme. 

44 | 10 September 2009 




HSBC France 



HSBC France (HSBC) is the eighth-largest bank in France with a market share of about 

3%; thus one of the smaller players in this handbook. However, as a wholly-owned 

(99.9%) subsidiary of HSBC Bank plc and an integrated part of HSBC Group, one of the 

world’s largest financial institutions, HSBC has access to global synergies in every 

banking aspect. 

HSBC’s origins date back to 1894 when it was established as Banque Suisse et Française, 

later CCF. In 1982 the bank was nationalised, but returned to the private sector in 1987. 

In 2000 CCF became a member of the HSBC Group and in November 2005 the bank 

changed name and brand, with the former CCF and four out of 10 regional banks in the 

group coming together to create what today is known as HSBC France. 

Today HSBC is represented throughout France and primarily focuses on an upscale 

clientele. The bank has a well-diversified business profile that combines retail banking, 

corporate banking, market activities, asset management and private banking. 

On February 29, HSBC France announced that it had entered into negotiations with 

Groupe Banque Populaire for the sale of seven regional banks of the HSBC France group 

operating under their own names. On July 2 the sale was finalised for a total consideration 

of EUR2.1bn. The seven banks have 400 branches and represent roughly half of the 

network and about 40% of its retail customer base. In terms of lending the seven banks 

represent EUR5.4bn of lending, which corresponds to about 10% of total gross loans 

year-end 2007. With the sale of the seven regional banks HSBC France has reduced its 

focus on retail banking and now relies increasingly on the more volatile corporate and 

investment banking. 

HSBC is well capitalised with core Tier 1 ratio of 9.5%. 



Issuer rating 

Aa2n/AAn/AAn 




Moodys TPI 

Probable (exp) 





EURm 2008 2007 

Net interest income -190 179 

Fees & commissions 716 964 

Net gain/losses 45 -5 




NPL 1.2% 0.7% 

Loan loss coverage 56% 51% 


Core capital ratio 9,5% 8.8% 





HSBC generated operating profit in 2008 of EUR1.7bn up from EUR1bn in 2007. 

Operating profit was boosted by the sale of the seven regional banks. Pre-provision 

income was up 18% but adjusted for the sale of banks, pre-provision income fell by 26%. 

The decline was mainly attributable to underperformance in Global Banking and Markets 

(down 68% y/y) and Private banking (down 61% y/y). HSBC reported cost efficiency of 

48%, but adjusted for one-offs this actually rose to 80% compared with 64% in 2007. 


Website 


n.a. 

hsbc.com 



+45 45 12 85 65 



HSBC France 


HSBC enjoys a relative strong liquidity position due to a large portion of customer 

deposit base (also after the sale of the seven regional banks) and a substantial amount of 

liquid assets. End-2008 deposits made up 36% of total funding with the remainder being 

interbank funding (47%), other market funding (17%, including cash securitisations) and 

subordinated debt (0.2%). According to Moody’s, the sale of the seven regional banks has 

not resulted in a significant shift of HSBC's liquidity positioning, although they had a net 

aggregate volume of deposits in excess of their lending. 

According to S&P, HSBC receives very little intra-group funding, but S&P expects that 

the bank would benefit from liquidity support from its parent if this were necessary. 


Total balance 

EUR266bn 

Deposits 16% 




Other 2% 

Equity 2% 


HSBC recently set up HSBC France Covered Bonds (HSBCCB), a French credit 

institution with limited purpose and subject to French banking authorities (but not subject 

to the covered bond legislation in France). However, to date no issuance has been made 

from this unit. 


HSCB has provided no information on cover pool. 


Cover pool 

EURbn 

Current O/C (committed) (8.1%) 


WA LTV 

WA Indexed LTV 

Seasoning 

NPL 

Fixed rate-mortgages 

Geography 

Only France 

-Ile-de-France 

- Rhône-Alpes 

Asset type 


- Owner-occupied 

-Buy-to-let 

-Second home 

- Other 


46 | 10 September 2009 







The issuer Société Générale SCF (SG SCF) is a specialised credit institution, 99.9%- 

owned by Société Générale (SocGen). SocGen is one of the largest financial institutions 

in the world with total assets of EUR1,130bn. 

SocGen is a diversified French banking and financial services (including insurance) group 

with a considerable international presence (represented in 82 countries in total). Its 

activities are split between five major divisions, retail banking in France, international 

retail banking, financial services, CIB and global investment management and services. 

SocGen provides retail banking and financial services to more than 26 million customers 

through approximately 3,000 French branches and 2,800 international branches. 

International operations focus on EU, Russia (through Rosbank), North Africa and Egypt. 

Domestic operations are performed through network and through Credit du Nord, an 

80%-owned subsidiary. SocGen has a significant exposure to CEE and Russia (11% of 

loan portfolio), which could have an negative impact on capital in a stressed scenario. 

Financial services include consumer finance, life insurance and non-life insurance. The 

CIB division provides a wide range of services, including corporate banking, futures 

broking, commodities business, structured finance, commercial banking and equity 

business. SocGen’s asset management division is one of the world’s largest with more 

than EUR430bn under management year-end 2007. Going forward, SocGen’s group 

strategy for 2008-2010 is to step up development in high potential business areas, that is 

to focus on international retail banking, consumer finance, mainly in developing countries 

(particularly the BRIC-countries) and private banking (assets under management 

expected to grow 50%). 



Issuer rating 

Aa2/A+/A+ 




Moodys TPI 

Probable 





EURm 2008 2007 







NPL 







In 2007 and 2008 net income was heavily impacted by writedowns in the CIB division of 

SocGen (EUR1.4bn in 2008 and EUR2.3bn in 2007). Hence the net income in 2008 was 

EUR2bn down from EUR5.2bn in 2006. In line with other retail banks loan losses and 

provisions are increasing and stood at EUR2.6bn in 2008 up from EUR0.9bn in 2007. 

The cost/income ratio is high (73%) and increasing (up from 60% in 2005) consequently 

ROE dropped to 5.2% in 2008 from 16% in 2005. 

Problem-loans-to-gross-loans has been fairly stable for several years and stands currently 

at 4.3, yet net interest margins more than tripled to 0.72% in 2008 up from 0.21% in 

2007. 

SocGen is well capitalised with a Total capital ratio/Tier 1 ratio of 11.6%/8.8%. 



Website 


SOCSCF 

socgen.com 

Chief Analyst 


+45 45 12 80 43 





As an issuer of ObF under supervision of the French FSA, SG SCF is operating according 

to specialist banking principles meaning the sole purpose of SG SCF is to fund 

mortgages, public loans and substitution assets by issuance of ObFs. There has been some 

confusion regarding the structure applied by SocGen. The use of the collateral directive 

(Article L.431-7-3) and the fact that for accounting reasons the assets in the inaugural 

transaction remained on SocGen’s balance sheet and not on SG SCF’s have prompted 

some to make a comparison with French structured covered bond programmes. 

Anyhow, the SG SCF programme complies fully with the legal framework of Obligations 

Foncier stated in Art. L515-13 to L515-33 of the French Monetary and Financial Code. 

The programme also makes use of the provisions of Art. 431-7-3 of the French Monetary 

and Financial Code (which incorporates the EU Collateral Directive) to create a security 

interest over assets (SocGen uses the same article to transfer title fully the day the assets 

are registered as eligible assets). It is important to stress that this option is only applicable 

to public assets. Housing loans cannot be transferred via 431-7-3; instead SocGen will 

transfer housing loans to a FCC (Fond Commun de Creance, a French securitisation unit) 

and the AAA tranches will then be transferred to SG SCF (and will be on the balance 

sheet of the SCF). SocGen can also transfer housing loans in the form of Billet 

Hypothecaire (French mortgage backed promissory notes), but they can only amount to a 

maximum of 10% of total cover pool assets. In conclusion, the transfers of housing loans 

is done in the same way as CIF Euromortgage. 


Total balance 

EUR 1,130bn 

Deposits 

288bn 

Short term debt 

273bn 

Long term debt 

89bn 

Equity 

41bn 


SocGen has incorporated several structural enhancements. Most importantly SG SCF is 

obliged to maintain a minimum O/C of 5% in respect of public assets and 7.5% in respect 

of housing loans. If SocGen later includes public loans from other countries these must 

apply to an O/C above 5%. The O/C is protected by law and thus will be available in case 

of default. Regarding ALM, SocGen will swap all assets in foreign currencies to euro at 

inception and interest rate swaps are used to reduce interest rate risk to a minimum. In 

respect of liquidity risk SocGen will provide a liquidity line of EUR5bn to cover any gap 

during: 1) 180 days before the final maturity of a bond; or 2) 90 days before each 

instalment date. 

Since the inaugural benchmark covered bond issuance in May 2008, SG SCF has issued 

two further benchmarks of 7y (EUR1.25bn) and 10y (EUR 2.25bn), respectively. The 

total covered bond issuance exceeds EUR5bn. For the whole of 2009 SocGen expects to 

raise EUR6-8bn via covered bonds by SG SCF or CRH. 


The cover pool amounts to EUR5.5bn and consists purely of loans to public French 

institutions. However, SocGen plans to add French housing loans to the portfolio. SocGen 

targets a 50:50 balance between public sector exposure and individual housing loans for 

2009-10. 

70% of the loan portfolio comprises fixed rate loans and 30% is floating rate (without 

cap). Currently, the O/C makes up 19% which is well above the minimum O/C of 5%. 

There are no non-performing loans in the cover pool. 

93% of the loan portfolio has an IRBA compliant internal rating above 2 (compliant to 

Aa3/AA-/AA-) out of which 83 is rated 1. 

Covered bonds issued by SG SCF are rated triple-A by all three rating agencies. 


Cover pool 

EUR 5.5bn 

Mortgages 

0bn 

Public loans 

5.5bn 

Other assets 

0bn 

O/C 19% 

NPL 0% 


(France) 

Rhône-Alpes 26% 

Ile-de-France (ex. Paris) 20% 

Nord-Pas-de-Calais 11% 

Provence-Alpes-Côte-dAzur 8% 

Haute-Normandie 6% 

Pays-de-la-Loire 5% 


48 | 10 September 2009 


Investment Research General Market Conditions 


Cover bond frameworks 

Legal overview 

In this appendix, we provide an overview of the covered bond frameworks in the 

following countries in Europe and Northern America: 

• Canada (individual contracts) 

• Denmark (Realkreditobligationer) 

• Denmark (Særlig dækkede obligationer/Særligt dækkede realkreditobligationer) 

• Finland (Kiineistövakuudellinen joukkovelkkakirjalaina) 

• France (Obligations Fonciéres) 

• France (individual contracts) 

• France (CRH) 

• Germany (Pfandbriefe) 

• Greece (legal based covered bonds) 

• Ireland (Asset Covered Securities) 

• Italy (Obbligazioni Bancarie Garantite) 

• Luxembourg (Lettre de garge) 

• Norway (Obligasjoner med fortrinnsrett) 

• Portugal (Obrigações) 

• Spain (Cédulas) 

• Sweden (Säkerställda obligationer) 

• The Netherlands (legal based covered bonds, individual contracts) 

• UK (Regulated Covered Bonds, individual contracts) 

• US (individual contracts) 



Canada 

Denmark 


Realkreditobligationer (RO) 

Framework Contractual Legal 

Type of 

Residential 

Mixed 

covered bonds 

Specialist banking No Yes 

Cover assets 

Residential 

Substitution assets (10%) 

Residential 

Commercial 

Public loans 


Hedging contracts 

On going valuation Subject to bank internal procedures No, only upfront 

Required O/C 

Subject to the asset percentage from the 8% of RW assets 

asset coverage test 

Asset segregation 

Equitable assignment to guaranteeing vehicle 

(GLP). 

Segregation, bankruptcy remote per se via capital centres. All assets on 

balance are cover assets, including hedging contracts. 

Matching requirements Asset coverage tests are performed to 

ensure that adjusted value of mortgages more 

than covers outstanding principal. Interest 

rate and currency hedging on contractual 

basis. Soft bullet repayment structure. 

Interest rate/currency risk 1/0.1% of capital base respectively. Future 

payments to investors must be covered by payments from borrowers received 

in advance or the capital base. Callable loans must be funded by callable bonds 

with matching cash flows. Interest rate risk is tested in scenarios of yield 

curve shifts and yield curve twist of +/- 100bp. (Note: It is assumed that the 

specialist banks use the specific principle even though they are allowed to use 

the general principle. In practice, they do use the specific principle.) 

Post bankruptcy procedures Cover pool becomes static, no acceleration of 

payments. A less strict asset coverage test is 

performed (amortisation test [nominal 

coverage test]). Breach of the test equals 

Cover pools become static, no acceleration of payments. A trustee will be 

appointed by the FSA to manage all financial transactions. The trustee has the 

option to issue mortgage bonds to refinance maturing mortgage bonds and 

subordinated debt to raise liquidity. 

default of GLP. If GLP defaults bonds are 

accelerated. 

Treatment of derivatives Termination of contracts would only occur if 

GLP defaults. The payment structure of a GLP 

Derivatives used for hedging of interest and currency risk have same 

preferential rights as covered bond investors. 

usually ranks derivative counterparts more 

senior than bondholders. 

LTV residential 80% 80% 

LTV commercial - 60% 

Accounting of loans in No recognition 

Yes 

arrears 

Fulfils UCITS/CRD No/No Yes/No 


50 | 10 September 2009 



Denmark 

Finland 

Særligt dækkede obligationer & realkreditobligationer (SDRO) Kiineistövakuudellinen joukkovelkkakirjalaina 

Framework Legal Legal 

Type of 

covered bonds 

Mixed 

Mortgage 

Public 

Specialist banking No (SDO), yes (SDRO) Yes 

Cover assets Residential 

Commercial 

Public loans 



Residential 

Commercial (10%) 

Public loans 

Substitution assets (20% temporary) 


On going valuation Residential: Every third year 

Regular valuation check 

Commercial: Every year 

Required O/C 8% of RW assets (mortgage banks). No O/C required (banks) No O/C required 

Asset segregation Segregation, bankruptcy remote per se via capital centres. All 

assets on balance are cover assets, including hedging contracts 

Cover register (separate registers for public and mortgage) 

including hedging contracts. 

(specialist banks). 


including hedging contracts (banks). 

Matching 

requirements 

The matching requirements depend on 1) whether the covered 

bond is a SDO or a SDRO, and 2) whether the issuer uses the 

specific or the general principle. 

In all cases, however, strict matching requirements apply and 

Nominal and NPV coverage is required. The average residual 

maturity of the covered bonds cannot exceed the average residual 

maturity of the assets. The interest payable in any given 12 month 

period to the bondholders must not exceed the interest received 

from the assets. Any currency mismatch must be hedged. 

several stress/scenario tests regarding interest rate risk, 

currency risk, and liquidity risk. 

Post bankruptcy 

procedures 

Cover pools become static, no acceleration of payments. An 

administrator will be appointed by the FSA to manage all financial 

transactions. The administrator has the option to issue mortgage 

Cover pool becomes static, no acceleration of payments. An 


transactions. 

bonds to refinance maturing mortgage bonds and subordinated 

debt to raise liquidity. 

Treatment of 

Derivatives used for hedging of interest and currency risk have Swap counterparties rank subordinated to covered bondholders. 

derivatives 

same preferential rights as covered bond investors. 

LTV residential 80% 60% (loans with higher LTV allowed but only portion up to 60% is 

considered eligible). Only one-sixth of the total mortgage pool must 

have above 60% LTV. 

LTV commercial 60% (70% if sufficient guarantee) 60% (loans with higher LTV allowed but only portion up to 60% is 

considered eligible). Only one-sixth of the total mortgage pool must 

have above 60% LTV. 

Accounting of loans Yes 

Yes 

in arrears 

Fulfils UCITS/CRD Yes/Yes Yes/Yes 


51 | 10 September 2009 



France 

France 

Obligations Fonciéres 


Framework Legal Contractual 

(EU Collateral Directive) 

Type of 

Mixed 

Residential 

covered bonds 

Specialist banking Yes No 

Cover assets 

Residential 

Commercial 

Public loans 

Residential 





On going valuation Every year Indexed house price index 

Required O/C No O/C required 8.1% (contractual) 

Asset segregation Asset segregation, bankruptcy remote subsidiary per se via SCF. Equitable assignment to guaranteeing vehicle (CB). 

All assets on SCFs balance are cover assets. 

Matching 

requirements 

Nominal coverage required but otherwise no matching 

requirements by law. However, interest, currency and NPV 

matching are implemented on a contractual basis. 

Asset coverage tests are performed to ensure that adjusted 

value of mortgages more than covers outstanding principal. 

Interest rate and currency hedging on contractual basis. Hard 

bullet repayment structure with a pre-maturity test. 


procedures 

SCF is bankruptcy remote from parent bank (which acts as asset 

originator and servicer). If the SCF is declared bankrupt, the 

entire SCF becomes static. No further claim against parent bank 

if cover assets prove insufficient to satisfy bondholders claims. 

Cover pool becomes static, no acceleration of payments. A less 

strict asset coverage test is performed (amortisation test 

[nominal coverage test]). Breach of the test equals default of CB. 

If LLP defaults bonds are accelerated. 

However, if the SCF becomes insolvent and the parent company 

is a going concern, the French banking regulators might put 

pressure on the holding company to provide support. 

Treatment of 

derivatives 

Derivatives used for hedging of interest and currency risk have 


Termination of contracts would only occur if CB defaults. The 

payment structure of a CB usually ranks derivative counterparts 

more senior than bondholders. 

LTV residential 60% (80% if 60-80% is 

80% 

non-privileged debt) 

LTV commercial 60% - 

Accounting of loans in Yes 

No recognition or haircut (30% in the amortisation test) 

arrears 

Fulfils UCITS/CRD Yes/Yes (until July 1, 2010) No/No 

(Yes/Yes expected in 2008) 


52 | 10 September 2009 



France 

Germany 

CRH 

Pfandbriefe 


Type of 

covered bonds 

Residential 

Mortgage 

Public 

Ships 


Cover assets 

Residential 

Substitution assets are not allowed 

Residential 

Commercial 

Public loans 

Substitution assets (20% mortgage, ships) 

Substitution assets (10% public) 

Hedging contracts (12% NPV basis) 

On going valuation Regular inspections by CRH Every two year 

Required O/C 25% (plus CRHs equity) 2% on NPV basis 

Asset segregation The refinanced housing loans refinanced by CRH remain on the 

banks balance sheets. However, in case of a borrower default, 



the loans will be transferred to CRH. 

Matching 

requirements 

Direct matching of both average life and present value between 

the pledged portfolio and the bonds. Moreover, the average 

Coverage by nominal value and NPV coverage is maintained 

under either dynamic or static cover pool. 

interest rate on the pledged portfolio must at least be equal to 

that of the bonds. 


procedures 

If the pledged portfolio is not enough to cover the liabilities, CRH 

has recourse to the borrowing bank (pari passu with the 

unsecured creditors). If this is still not enough, CRH defaults and 

the bondholders have recourse to CRH. 

No acceleration of payments. Special cover pool/covered bond 

administrator appointed with authorities to engage in bridge 

financing as well as transferring cover pool to another bank 

(hereafter cover pool becomes dynamic again). 

Treatment of 

derivatives 

CRH is not allowed to use derivatives as collateral. 


same preferential rights as covered bond investors. Limit of 12% 

of NPV. 

LTV residential 60% (80% if 60-80% is 

60% 

non-privileged debt) 

LTV commercial - 60% 


Yes 

arrears 

Fulfils UCITS/CRD Yes/yes Yes/Yes 


53 | 10 September 2009 



Greece 

The Netherlands 



Framework Legal Legal (individual contracts) 

Type of 

Mixed 

Residential 

covered bonds 

Specialist banking No No 

Cover assets 

Residential 

Commercial 

Residential 


Public loans 

Substitution assets 


On going valuation - Indexed house price index 

Required O/C 5.3% 5.5-10.5% (contractual) 

Asset segregation 1) Cover register including hedging contracts, or 2) SPV-set up Equitable assignment to guaranteeing vehicle (LLP). 

with equitable assignment to guaranteeing vehicle (CB). 

Matching 

requirements 

Nominal value coverage and NPV coverage is required - also 

under a 200bp shift in interest rates. Duration of bonds cannot 

exceed the duration of the cover assets. 



Interest rate and currency hedging on contractual basis. Different 

repayment structures (soft/hard bullet bonds). Hard bullet 

structure includes pre-maturity test and liquidity buffer. 


procedures 

In case of issuer insolvency cover pool becomes static, no 

acceleration of payments. An administrator is stipulated to take 

care of the cover assets. 


strict asset coverage test is performed (amortisation test 

[nominal coverage test]). Breach of the test equals default of LLP. 


Treatment of 

derivatives 



Termination of contracts would only occur if LLP defaults. The 

payment structure of a LLP usually ranks derivative counterparts 


LTV residential 80% Generally 80% (loan-to-market-value) or 125% (loan-toforeclosure-value) 

LTV commercial 60% - 


No recognition, repurchase or haircut 

arrears 

Fulfils UCITS/CRD -/- Yes/Yes (but only if the cover pool assets are compliant with 

CRD) 


54 | 10 September 2009 



Ireland 

Italy 

Asset Covered Securities 

Obbligazioni Bancarie Garatite 


Type of 

covered bonds 

Residential 

Commercial 

Mortgage 

Public 

Public 


Cover assets 

Residential 

Commercial 

Public loans 



Residential 

Commercial 

Public loans 



On going valuation Regular valuation check (at least once a year) based on prudent 

market value principles 

Professional valuer with market value as basis (semi-annual 

review) 

Required O/C 

Residential 3% (nominal basis) 

No minimum O/C required by law 

Commercial 10% (nominal basis) 

Public loans 3% (NPV basis) 

Asset segregation Cover register (separate register for public, commercial and Cover register including hedging contracts. 

mortgage) including hedging contracts. 

Matching 

Nominal and NPV coverage is required. Duration of bonds cannot NPV and nominal coverage is required. 

requirements 

exceed assets. The average residual maturity of the covered 

bonds cannot exceed the average residual maturity of the assets. 

The interest payable in any given 12-month period to 

bondholders must not exceed the interest received from assets. 


procedures 



transactions. 



transactions. 

Treatment of 

derivatives 





LTV residential 75% (loans with higher LTV allowed but capped at 75%, 

80% 

maximum average LTV 80%). 

LTV commercial 60% (loans with higher LTV allowed but capped at 60%, 

60% 

maximum average LTV 80%) 

Accounting of loans in No recognition, substitution indented. 

No recognition, substitution indented. 

arrears 



55 | 10 September 2009 



Luxembourg 

Norway 

Lettre de gage 

Obligasjoner med fortrinnsrett 


Type of 

covered bonds 

Mortgage 

Public 

Mixed 

Mortgage 

Public 

Specialist banking Yes Yes 

Cover assets 

Residential 

Commercial 

Public loans 



Residential 

Commercial 

Public loans 

Substitution assets (20%, up to 30% with the consent of the 

supervisor) 


On going valuation Regular valuation check Regular valuation check 

Required O/C No O/C required No O/C required 

Asset segregation Cover register (separate registers for public and mortgage) 


Cover registers (joint registers or separate registers for public, 

commercial and mortgage) including hedging contracts. 

Matching 

requirements 

Nominal and NPV coverage is required. The interest payable to 

the bond holders must not exceed the interest received from the 

assets. 

Nominal coverage and NPV coverage. Nominal coverage is 

maintained under stress-scenarios (parallel yield curve shifts +/- 

100bp and twists. Currency stress tests +/- 10%). 


procedures 



transactions. 



transactions. Further details to be announced. 

Treatment of 

derivatives 





LTV residential 60% (loans with higher LTV allowed but only portion up to 60% is 75% 

considered eligible). 

LTV commercial 60% (loans with higher LTV allowed but only portion up to 60% is 60% 

considered eligible). 

Accounting of loans in 

arrears 

Yes 

Yes, but only performing loans are included in the matching 

calculations. 

Fulfils UCITS/CRD Yes/No Yes/Yes 


56 | 10 September 2009 



Portugal 

Spain 

Obrigações 

Cédulas 


Type of 

covered bonds 

Mortgage 

Public 

Mortgage 

Public 

Specialist banking Optional No 

Cover assets 

Residential 

Commercial 

Public loans 



Residential 

Commercial 

Public loans 



On going valuation Regular valuation check based on prudent market value 

Regular valuation check 

principles (residential = every three years, commercial = every 

year). 

Required O/C 

Nominal O/C of 5.26%. Voluntary O/C protected by law in case of 

insolvency. 

Mortgage 25% 

Public 43 % 

Asset segregation Cover register including hedging contracts. Cover register including hedging contracts. Investors have a 

priority claim over entire mortgage book. 

Matching 

Nominal and NPV coverage required. On NPV basis the cash flow No matching requirements. 

requirements 

from the cover pool must exceed that of the covered bonds taking 

into accounts stress tests (+/- 200bp). The average residual 

maturity of the covered bonds cannot exceed the average 

residual maturity of the assets. The interest payable to 

bondholders cannot at any point in time exceed the interest 

received from assets. Currency risk must be hedged. 


procedures 

No acceleration of payments, however bonds can accelerate if 

two-thirds of bondholders vote in favour. An administrator will be 

appointed by the FSA to manage all financial transactions. 

No acceleration of payments, cash flows from mortgage loan 

book continue to make payments to bondholders. The law does 

not specify who will take over administration. For joint-Cédulas, a 

liquidity buffer is provided and any potential loss from the default 

of one of the participating banks is distributed pro rata among 

other participants. 

Treatment of 

derivatives 





LTV residential 80% 80% (95% in case of bank guarantee or credit loan insurance). 

LTV commercial 60% 60% 

Accounting of loans in If arrears > 90 days loan must be replaced. 

Yes 

arrears 



57 | 10 September 2009 



Sweden 

UK 

Säkerställda obligationer 

Regulated Covered Bonds 

Framework Legal Legal (individual contracts) 

Type of 

Mixed 

Mortgage 

covered bonds 

Specialist banking No No 

Cover assets 

Residential 

Commercial (10%) 

Public loans 

Substitution assets (20%, can be increased to 30% if approved). 

Residential 

Commercial 

Substitution assets (In most contracts, substitution assets can 

constitute up to 10/15%). 


On going valuation Regular valuation check Indexed house price index 

Required O/C No O/C required 7.0-20.5% (contractual) 

Asset segregation Cover register (shared register for public and mortgage) 

Equitable assignment to guaranteeing vehicle (LLP). 


Matching 

requirements 

Nominal as well as NPV coverage. NPV coverage is maintained 

under stress-scenarios (parallel yield curve shifts +/- 100bp and 

currency +/- 10%). 



Interest rate and currency hedging on contractual basis. Different 

repayment structures (soft/hard bullet bonds). Hard bullet 

structure includes pre-maturity test and liquidity buffer. 


procedures 



transactions (not a dedicated cover pool administrator). Bridge 

financing is not allowed but administrator can sell assets to 


strict asset coverage test is performed (amortisation test [ 

nominal coverage test]). Breach of the test equals default of LLP. 


generate liquidity for bond holders. 

Treatment of 

derivatives 



Termination of contracts would only occur if LLP defaults. The 

payment structure of a LLP usually ranks derivative counterparts 


LTV residential 75% 80% 

LTV commercial 60% (70% agricultural) 60% 

Accounting of loans in Repurchase if arrears > 60 days 

No recognition, repurchase or haircut 

arrears 

Fulfils UCITS/CRD Yes/Yes Yes/Depends on contracts 


58 | 10 September 2009 



US 

Covered Bonds 

Framework 

Contractual 

Type of 

Residential 

covered bonds 

Specialist banking No 

Cover assets 

Residential 



Ongoing valuation Indexed house price index (15% haircut for indexed valuation). 

Required O/C 

4.2% (Bank of America) 

7.5% (Washington Mutual)) 

Asset segregation WM/BoA issue covered bonds through statutory trusts. Asset 

segregation is achieved by cover registers in the banks own 

books. 

Matching 


requirements 


Interest rate and currency hedging on contractual basis. Soft 

bullet repayment structure (120 days). 

Post bankruptcy Default of the bank does not accelerate payments. But if the 

procedures 

statutory trust defaults, all payments would be accelerated. 

Treatment of 

Depending on the contract 

derivatives 

LTV residential 75% (contractual) 

LTV commercial - 

Accounting of loans in If arrears > 60 days, loans are not taken into account in the ACT 

arrears 

Fulfils UCITS/CRD No/No 


59 | 10 September 2009 



Disclosure 

This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. 

Danske Bank is under supervision by the Danish Financial Supervisory Authority. The authors of this report are 

Stig Tørnes, chief analyst, Christian Riemann Andersen, senior analyst and Kristian Myrup Pedersen, analyst. 

Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’ 

Ethical rules and the Recommendations of the Danish Securities Dealers Associations. 

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high 

quality research based on research objectivity and independence. These procedures are documented in the Danske 

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profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other 

remuneration linked to specific corporate finance or dept capital transactions. 

The Equity and Corporate Bonds analysts of Danske Bank and their associates are not permitted to invest in 

securities under coverage in their research sector. 

Danske Bank is a market maker and may as such hold positions in the financial instruments mentioned in this 

report. 

Please go to www.danskeequities.com for further disclosures and information. 

Disclaimer 

This publication has been prepared by Danske Markets for information purposes only. It has been prepared 

independently, solely from publicly available information and does not take into account the views of Danske 

Bank’s internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial 

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regulation by the Financial Services Authority are available from us on request. Copyright (C) Danske Bank A/S. 

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60 | 10 September 2009 


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French Covered Bond Handbook 2nd edition - Danske Analyse ...

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