Crédit Agricole is getting closer to finalising a Eu10bn programme for the issuance of obligations foncières that will initially be backed by asset based loans guaranteed by export credit agencies (ECA), with French public sector loans possibly being added later.

The issuer set up Crédit Agricole Export Credit Agencies SCF last year (see here for previous coverage), and has begun providing more details about the new programme and the motivation behind it.

In a presentation last month the French bank said that the covered bond issuer was set up to provide for cost efficient refinancing of Crédit Agricole CIB’s developing export credit financing activities, which are high quality/low margin by nature, and for refinancing of lending to public entities by Crédit Agricole regional banks.

Issuance of public sector backed obligations foncières will also diversify funding sources “at an optimal cost”, according to Crédit Agricole.

The programme is expected to be rated Aaa by Moody’s and AAA by Standard & Poor’s, said the bank.

According to the presentation the cover pool will from launch comprise loans originated by the Crédit Agricole group and guaranteed by ECAs benefitting from strong sovereign ratings. Loans to French public entities could be introduced to the cover pool at a later stage.

The presentation describes Crédit Agricole CIB as one of the top institutions in the asset-based financing business, with leading positions in aviation, shipping, and project finance, especially infrastructure, power, and oil and gas. Its portfolio of ECA guaranteed loans exceeds Eu16bn, with 54% of the loans fully secured by assets (ships or aircraft).

UniCredit senior analyst Florian Hillenbrand said that one of the challenges involved in the ECA business is that ECA insurance does not cover the entirety of a loan, instead most commonly covering 95% of the loan but, depending on the contract, also as low as 80%.

“For Pfandbrief financing this requires an additional securitization guarantee, which is a make-whole guarantee that is not in favour of the bank but rather in favour of the bondholder benefitting from the ECA-related collateral,” he said. “Crédit Agricole does not have to obtain an additional securitization guarantee but instead takes a haircut on the available assets depending on the guarantee ratio.”

The initial cover pool comprises Eu2.5bn equivalent of drawn ECA loans numbering 128 in aggregate, with 49% of the collateral representing aircraft financings, 26% energy project loans, and 25% financing in other industries.

The majority of the loans (58%) in the initial pool are guaranteed by Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE), a French ECA, 19% by the UK-based Exports Credit Guarantee Department (ECGD), and 24% by credit insurer Euler Hermes.

Along currency lines the initial cover pool is split evenly between US dollars and euros. Loans to borrowers in Ireland make up the biggest portion of the cover pool at 16%, with the rest split across 23 countries.

Hillenbrand, who attended a UniCredit bank investor conference at which Crédit Agricole presented its new programme, noted that ECA loans often pay floating rate interest and have fairly short durations because of frequent call options, which can cause problems such as reinvestment risk, and that where funding is more or less matched the short duration of the loans only allows for relatively short dated covered bonds, undermining the profitability of setting up covered bond issuance infrastructure rather than using unsecured funding.

However, he said that according to Crédit Agricole the bank does not face these problems because the receivables in its loan book have durations of five to seven years, often paying fixed interest without call options.