Moody’s cut CIF Euromortgage obligations foncières from Aaa to Aa1 this (Tuesday) morning, after lowering the senior unsecured rating of 3CIF from A1 to Baa1 and leaving it on review with direction uncertain given the difficulties of finding a long term solution for the group.

Concerns about CIF’s reliance on wholesale funding in February prompted Moody’s to put its rating of Caisse Centrale du Crédit Immobilier de France (3CIF) on review for downgrade. This led to a delay in the signing off of 3CIF and CIF Euromortgage accounts for 2011, which in turn resulted in a suspension of trading of the two issuers’ bonds for two weeks in May.

Moody’s said today that the rating of 3CIF – the rated funding entity of the Crédit Immobilier de France group – now incorporates nine notches of systemic support, compared with 12 previously, with the rating agency basing this on its assessment of a rising probability of a run-off scenario for the group and associated transition risks for creditors.

“This reflects the hurdles in arriving at a long term solution to the group’s structural funding challenges,” it said. “At the same time, the rating agency considers that the French authorities are keen on addressing the current situation shortly, which may result in CIF being acquired by a long term investor.”

Moody’s said that to its knowledge no offer has been made for CIF yet, despite HSBC having been mandated to find a long term solution for the group and La Banque Postale having publicly stated a potential interest. While noting that the French authorities would likely influence La Banque Postale’s decision, Moody’s pointed out that its management is already concerned with a number of important projects, notably the restructuring of Dexia Crédit Local.

The rating agency said that, with CIF no longer having access to the capital markets, a Eu1.75bn covered bond issue maturing in early October, the group will probably require liquidity assistance from the central bank absent a long term solution.

CIF Euromortgage’s obligations foncières were downgraded because the lowering of sponros bank 3CIF’s rating to Baa1 means that, with a Timely Payment Indicator (TPI) of “probable high”, Aa1 is now the maximum rating that can be achieved.

Moody’s put its estimated cover pool losses for the programme at 8%, split between market risk of 8% and a collateral risk of 0%, which in turn reflects a collateral score of 0%. The rating agency said that the overcollateralisation in the cover pool is 6.4%, of which 2% is provided on a “committed” basis, and that the minimum OC level consistent with a Aa1 rating target is 4.5%.

“Therefore, Moody’s is relying on ‘uncommitted’ overcollateralisation in its expected loss analysis,” it added.

RBS analysts said that they understand CIF Euromortgage to have entered into a swap agreement with 3CIF to hedge against interest rate and currency risk on the asset side.

“According to Moody’s swap counterparty framework, 3CIF, within 30 business days, has to obtain a guarantee or be replaced following its downgrade to Baa1 using ‘commercially reasonable efforts’,” said the analysts. “In the interim, additional collateral has to be posted.

“The latter has already been done. Should CIF Euromortgage fail to obtain a sufficient guarantee or find a replacement, Moody’s would increase its OC requirements to maintain the current rating of the OFs.”

Another covered bond analyst noted that Moody’s showed limited concern about the quality of CIF Euromortgage’s cover pool.

“We argue that given the current hunt for yields and few bonds being available in the secondary market, this will have hardly any spread impact currently,” he said. “Even in the event of increasing French covered bond issuance in September, the impact on CIF Euromortgage should not be specific compared with the broader market impact.”