Standard & Poor’s has affirmed at AAA on stable outlook covered bonds of Compagnie de Financement Foncier because the issuer has been making progress toward meeting the rating agency’s updated counterparty criteria, thereby averting a possible four notch cut. Meanwhile, it extended a negative review of Dexia MA obligations foncières.

CFF’s obligations foncières had been placed on CreditWatch negative on 19 December because S&P considered there to be “execution risk” relating to the issuer’s progress toward meeting updated counterparty risk criteria by a 11 January deadline, especially concerning derivatives obligations. A possible downgrade of four notches to CFF’s programme had been flagged by S&P.

The rating agency yesterday (Wednesday) said that CFF has been renegotiating its derivative documentation to bring derivative agreements in line with the structural features for counterparty replacement outlined in S&P’s current or previous counterparty criteria, and that it understands that CFF is still pursuing this initiative.

In addition, on 28 December CFF published on its website certain commitments regarding swap contracts, said S&P. These are:

• for swap contracts with an additional termination event (ATE) provision that the issuer, upon the ATE trigger being hit, commits to find a replacement, take over the derivative obligation, or increase the overcollateralisation to address unhedged risk within 60 calendar days

• for the unsubordinated termination costs in swap contracts with no S&P replacement framework: if BPCE is no longer rated A-1, the issuer undertakes to replace or amend the swap contracts (including contractual subordination of swap termination payments) to bring the notional amount of such swaps below 5% of the outstanding privileged liability within 60 days.

“These commitments mitigate the risk of an immediate constraint on the rating on the program to one notch above the ICR [issuer credit rating] on CFF,” said S&P.

The rating agency said that it has reviewed credit and cashflows after applying its new counterparty criteria, and that the results pave the way for it to affirm and remove from CreditWatch negative its AAA/A-1+ long and short term ratings of CFF’s obligations foncières.

The rating is on stable outlook because the AAA rating only uses five of seven notches of available uplift above the issuer rating under S&P’s criteria.

Also yesterday, S&P said that it is keeping on CreditWatch negative the AA+ rating of Dexia Municipal Agency obligations foncières pending completion of the sale of the issuer, to a new government-sponsored bank. It said that its assessment of counterparty risk in Dexia MA’s covered bond programme caps its rating at one notch above the issuer credit rating, but that the latter is being reviewed in light of the sale of Dexia MA to Nouvel Etablissement de Crédit. NEC is a new bank that will initially be majority owned by the French government (75%), with Caisse des Dépôts et Consignations (CDC) and La Banque Postale having 20% and 5% stakes, respectively.

S&P said that its assessment of counterparty risk is the key constraint on Dexia MA’s covered bond ratings.

“We understand that there are derivative agreements in place with unsubordinated termination payments and no replacement framework exists, that is consistent with current or previous Standard & Poor’s counterparty criteria,” it said. “The total notional amount of these derivative agreements represents significantly more than the 5% materiality threshold under our criteria.

“We see a risk that a swap counterparty could default while in-the-money, and be owed a substantial termination payment, which would be due immediately and would rank pari passu with covered bond payments.”

The rating agency said that as of 31 December this risk existed on derivative agreements with 23 different counterparties, and the largest exposure for a potential termination payment due to a single counterparty was around Eu1.4bn.

RBS analysts said that for Dexia MA’s obligations foncières to maintain their AA+ rating from S&P, the issuer’s new owner would need to be rated within one notch of France and CDC, and that this should be achievable given the new entity’s importance for the French public sector.

“The lower boundary would probably be a AA- rating if the issuer is rated in line with La Banque Postale (keep in mind that they have an option to gradually increase their ownership to 33%),” added the analysts. “However, we would see this outcome as less likely than the other two.”

They noted that S&P said that if the sale of Dexia MA to NEC does not take place within the announced timeframe (with S&P citing a 31 January deadline for the closing of the sale) the rating agency would take action by cutting the issuer by five notches to A-, assuming all else remains equal, and that therefore a temporary risk remains that the obligations foncières will be downgraded by S&P.