Moody’s has raised from “probable” to “probable-high” its base case Timely Payment Indicator (TPI) for home loans covered bonds issued under the legal framework for Sociétés de Financement de l’Habitat (SFH), and cited a wider improvement to French covered bonds including obligations foncières.

The TPI action was announced yesterday (Wednesday) and according to Moody’s followed the expiration of a 12 month window period in January for conversion of structured covered bonds into obligations à l’habitat (OH) issued by an SFH.

Six French covered bond programmes are affected, four of which were conversions of structured covered bonds into OH programmes and two of which are new programmes set up directly under the SFH framework.

The conversion issuers are BNPP Home Loan SFH, CM CIC Home Loan SFH, Crédit Agricole Home Loan SFH, and HSBC SFH, and the new programmes are BPCE SFH and Société Generale SFH.

Moody’s said that the TPI adjustment means that the base case TPI for covered bonds issued under the SFH law is aligned with those under a separate law governing obligations foncières issued by Sociétés de Crédit Foncier.

Issuers under these laws benefit from the same legal framework, except with respect to asset eligibility criteria, said Moody’s.

“In addition, the strong legislative and regulatory framework applicable to French legal covered bonds have been further reinforced at the time of implementation of the new SFH regime,” it said. “These new provisions improve the likelihood that timely payments will be made to covered bond investors following the default of the bank supporting the covered bonds.”

According to Moody’s, the main credit improvements to the SCF legal framework include:

(i) The law requires a minimum overcollateralisation of 2%.

(ii) A liquidity buffer must be maintained at all times which covers potential cash flows mismatches within the following 180 days.

(iii) Issuers are authorised to withhold their own covered bonds up to 10% of the issuance size, and use them as collateral for liquidity operations with the central banks.

The rating agency also highlighted that over the crisis French home loans covered bonds have been one of the most liquid financial instruments in Europe to date.

“A deep covered bond market improves the chances that timely payments on covered bonds will be made following the default of the bank supporting the covered bond,” it said. “The reason for this is that if covered bonds can readily be sold into a market in times of stress, then the probability improves that the issuer (i) can either find a bank willing to take over the covered bond programme; or (ii) raise finance against the cover pool.”