Ratings of French covered bonds are unlikely to be significantly affected by a downgrade of France from Aaa to Aa1 yesterday (Monday), according to analysts, even if the rating action has a knock-on effect on the country’s banks.

Covered bond analysts noted that most French covered bonds have at least one notch of Timely Payment Indicator (TPI) leeway over the rating of their issuers, so they are expected to be able to maintain their Aaa ratings despite France’s downgrade should the sovereign action lead to a lowering of banks’ ratings.

Covered bonds issued by Dexia Municipal Agency and CIF Euromortgage do not have any notches of uplift left. However, with the two issuers undergoing restructuring processes that are subject to European Commission approval, Florian Eichert, senior covered bond analyst at Crédit Agricole, said that their ratings are being driven by issues of government support.

“We can’t fully rule out Moody’s acting in the meantime,” he said, “but I would be surprised, to be honest, as we think it would be sensible to wait for a final word from Brussels.”

Eichert also said that some public sector covered bond programmes could be “slightly affected” as a lower rating of the issuers would result in higher overcollateralisation requirements. Issuers that could be affected are Crédit Mutuel Arkéa, Société Générale SCF, and Dexia Municipal Agency, he said.

“I don’t expect major moves though as we’re still talking about a strong double-A rating which is something many other covered bond sectors can’t claim for themselves anymore,” said Eichert.

The announcement of the downgrade did not trigger any major selling of French covered bonds, said market participants.

“So far this morning, our traders have not seen any significant selling of French covered bonds,” said Frank Will, head of covered bond and supra/agency strategy at RBS. “Talking to investors, we got the feeling that most of them are done for the year and have more or less closed their books after a better than expected year in terms of covered bond spread performance.”

Moody’s mentioned the vulnerability of the French banking system in its explanation for the downgrade of France.

“Despite their good loss absorption capacity, French banks remain vulnerable to a further deepening of the crisis due to these exposures and their significant – albeit reduced – reliance on wholesale market funding,” said the rating agency.

However, according to Will, it is unlikely that the downgrade of the sovereign will lead to a downgrade of French issuers.

“French banks are currently all rated A2, all factoring in three notches of sovereign support,” he said. “The ratings differential to the sovereign stands at four notches, whilst the ability of the French sovereign to support its banks remains substantial, as denoted by the high Aa1 credit rating.”

However, the rating of banks in France is considered “benign”, said Will, so a potential outlook revision to negative or a one notch downgrade “is not completely off the cards”.