Fitch revised the outlook on covered bonds issued by Caisse de Refinancement de l’Habitat (CRH) from negative to stable yesterday (Monday) and upgraded their D-Cap after the French issuer appealed a previous rating action and provided additional information.

The D-Cap was lifted from “high” (2) to “moderate high” (3), following a revision of the liquidity gap and systemic risk components of Fitch’s analysis.

On 14 September, Fitch assigned to CRH’s covered bond programme a “high” liquidity risk assessment, saying that only weak mechanisms were in place to mitigate a liquidity gap that could arise from the default of one of CRH’s main shareholders. Fitch said it understood that in case a shareholder failed to deposit a redemption amount five days before the maturity date of a covered bond, other shareholders would contribute only up to 5% of their respective borrowing to compensate.

“However,” said Fitch yesterday, “based on additional information received by Fitch, this commitment is now assessed as joint and several, so that if a shareholder were to default, the shortfall would need to be funded by the remaining, solvent shareholders. Nevertheless, despite the slightly higher liquidity provisioning, the commitment could still prove insufficient to achieve a timely payment upon the default of a larger shareholder in upcoming years.”

“As such, the D-Cap continues to reflect the likelihood that systemic support for CRH bonds would be forthcoming in such a scenario, and that shareholders may provide liquidity above 5% of outstanding bonds if needed.”

Fitch said the new D-Cap gives a “larger cushion” before a downgrade of CRH’s main shareholders could lead to a downgrade of CRH’s covered bonds. This means that the negative outlooks on Crédit Agricole/Le Crédit Lyonnais, Société Générale/Crédit du Nord, and BPCE, which together account for 57% of CRH’s promissory note exposures, no longer apply to the covered bonds issued by CRH, hence the revision of the outlook on the programme to stable.