CIF group will receive a state guarantee in light of its prevailing financial difficulties, the French government said on Saturday, with analysts expecting CIF Euromortgage liabilities to come under the guarantee, while a run-off of the group is also seen as a possible outcome.

In a statement released on Saturday night Pierre Moscovici, finance and economics minister, said that Crédit Immobilier de France’s business model, which relies almost exclusively on the wholesale funding markets, was weakened by the financial crisis and that new Basel III regulations also contributed to the group’s difficulties, with efforts to find a buyer so far unsuccessful.

Pierre Moscovici

The difficulties of finding a long term solution for the CIF group were what prompted Moody’s to last week downgrade the senior unsecured rating of Caisse Centrale du Crédit Immobilier de France (3CIF), the rated funding entity of the CIF group, which in turn prompted a lowering of CIF Euromortgage’s obligations foncières from Aaa to Aa1.

Moscovici said that in light of the fragility of the group’s situation the government has decided to respond favourably to a request to grant it a guarantee to allow CIF to meet “all its commitments”.

The guarantee, which has been put as amounting up to Eu20bn, is conditional upon approval by the European Commission and European Parliament, which a covered bond analyst said is likely to be forthcoming.

“Given that EC approval for guarantees was granted in all comparable cases in the past,” he said, “via certain restructuring requirements for the receiving banking group but without requiring any kind of burden-sharing regarding covered bonds, CIF Euromortgage obligations foncières seem strongly protected.”

However, a syndicate banker said that the price for EC approval of the guarantee could be that the CIF group has to cease operating, and placed into run-off mode.

RBS analysts said that a run-off scenario is probably not the preferred solution for the French state, and that they believe CIF will be on hold in the short term, i.e. not originating new loans as is the case with Dexia Municipal Agency, and that more clarity will be forthcoming.

The minister’s statement does not provide any details on the scope of the guarantee, including on whether it extends to 3CIF and/or CIF Euromortgage, the group’s covered bond issuer, and neither the ministry of finance and economics nor representatives CIF Euromortgage had responded to questions from The Covered Bond Report by the time of going to press.

However, analysts said they expected these entities’ liabilities to be guaranteed, with one noting that addressing the maturity of a Eu1.75bn obligations foncières issue on 11 October was the “most urgent”.

“The guarantee will have a positive impact even without details, and the immediate concerns have been alleviated although the future of the group still remains in the balance,” he said.

Another analyst said that the decision by a French socialist government to come to CIF’s aid despite being opposed to bank rescues underlined the importance of CIF and CIF Euromortgage in France.

Moscovici’s announcement provides something of a breather for the CIF group and investors after a challenging period that began when 3CIF’s and CIF Euromortgage bonds were suspended from trading for two weeks in May after a delay in the signing off of the two issuers’ accounts for 2011, which was linked to Moody’s in February putting its rating of 3CIF on review for downgrade because of concerns about the CIF group’s reliance on wholesale funding.

Moody’s last Tuesday (28 August) cut CIF Euromortgage obligations foncières from Aaa to Aa1, 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.

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