We do not expect the recent downgrade of France (AA-/Stable/A-1+) to affect the rating on French covered bond programs that are backed by residential loans. This is because they are protected by the sizeable available overcollateralization, even in cases where the required credit enhancement increases. However, for French public sector programs, we are currently evaluating the potential effect under the applicable criteria due to, among others, their higher sensitivity to sovereign default risk and a potential deterioration in the cover pool credit quality.
| French residential covered bond programs before and after the sovereign downgrade | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Available overcollateralization (%) | Commensurate credit enhancement before the sovereign downgrade (%) | Commensurate credit enhancement after the sovereign downgrade (%) | Unused notches before the sovereign downgrade | Unused notches after the sovereign downgrade | Covered bond rating | |||||||||
|
AXA Home Loan SFH |
15 | 14.84 | 14.84 | 3 | 3 | AAA/Stable | ||||||||
|
BNP Paribas Home Loan SFH |
23.51 | 3.99 | 3.99 | 5 | 5 | AAA/Stable | ||||||||
|
BPCE SFH SA |
40.39 | 10.01 | 11.81 | 4 | 4 | AAA/Stable | ||||||||
|
CCF SFH |
74.56 | 21.6 | 21.6 | 0 | 0 | AAA/Negative | ||||||||
|
Credit Agricole Home Loan SFH |
49.07 | 7.47 | 7.47 | 5 | 5 | AAA/Stable | ||||||||
|
Credit Mutuel Home Loan SFH |
57.6 | 8.07 | 8.07 | 5 | 5 | AAA/Stable | ||||||||
|
La Banque Postale Home Loan SFH |
39.91 | 5.34 | 10.9 | 5 | 3 | AAA/Stable | ||||||||
|
MMB SCF |
15.92 | 5.99 | 5.99 | 0 | 0 | AAA/Negative | ||||||||
| Source: S&P Global Ratings. | ||||||||||||||
What's Happening
On May 31, 2024, we lowered the long-term sovereign rating on France to 'AA-' from 'AA'.
Why It Matters
Based on our applicable criteria, rating actions on the sovereign could affect covered bond programs in various ways. Among others, they may potentially:
- Lower the starting point of the notching analysis when the issuer credit rating is linked to the sovereign (applies to government-related entities);
- Lead to a deterioration in the cover pool credit quality if the latter depends, to a certain extent, on the sovereign (public sector only);
- Reduce the jurisdictional rating level (JRL) on the program; and
- Cap a covered bond rating due to sovereign default risk considerations, which is particularly the case for public sector programs.
Programs, where the JRL is affected by the sovereign downgrade, may face an increase in credit enhancement required for the current rating. This is because of the additional notches of collateral support uplift that are necessary to reach the current rating. Under our covered bond criteria, the JRL reflects the likelihood that a covered bond facing stress would receive support from a government-sponsored initiative instead of from the liquidation of collateral assets in the open market. The JRL uplift from the RRL is capped by the sovereign rating as any form of jurisdictional support would be unlikely in a sovereign default scenario.
We currently do not expect that sovereign default risk considerations will cap any of our covered bond ratings. According to our criteria, residential programs can sustain up to a five-notch rating differential above the sovereign if certain conditions are met. On the other hand, the ratings on public sector programs in a single jurisdiction can be two notches above the sovereign. The rating differential can be larger in the case of multi-jurisdictional pools due to their exposure to other sovereigns.
What Comes Next
Under the applicable criteria, the sovereign downgrade could have potential effects on public sector covered bond programs. We are currently assessing those effects.
Related Research
- France Long-Term Rating Lowered To 'AA-' From 'AA' On Deterioration Of Budgetary Position; Outlook Stable, May 31, 2024
- Global Covered Bond Insights Q2 2024, March 27, 2024
- French Covered Bond Market Insights 2023, Sept. 7, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Adriano Rossi, Milan + 390272111251; adriano.rossi@spglobal.com |
| Secondary Contact: | Denitsa Carouget, Paris +33 144207219; denitsa.carouget@spglobal.com |
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