Covered bonds issued by the former Dexia MA, now Caisse Française de Financement Local (CFFL), were upgraded to AAA by S&P on Friday, while Fitch affirmed their AAA rating and said that it expects CFFL to activate its obligations foncières programme in the coming months.

Standard & Poor’s had rated the obligations foncières AA+, but upgraded them to AAA and removed the rating from CreditWatch negative following the closing of the sale of Dexia Municipal Agency to Société de Financement Local (SFIL), which the rating agency has rated AA+, in line with the French sovereign.

SFIL is 75% owned by the French state, 20% by Caisse des Dépôts et Consignations, and 5% by La Banque Postale.

The rating agency said that the sale of Dexia MA has more than offset the impact of counterparty risk, which had been one of the factors behind its negative review of the covered bonds, and that this triggered the upgrade of the covered bonds’ rating.

As of 30 September available credit enhancement was high enough to support at least a one notch uplift of CFFL’s covered bonds above the issuer rating of SFIL, with the latter in S&P’s view being sufficiently highly rated to manage asset-liability maturity mismatch risk in the covered bonds to a AAA level.

Under S&P criteria CFFL’s covered bond ratings are capped at one notch above the French sovereign rating, and one notch above the issuer credit rating of SFIL. The second cap is linked to S&P’s counterparty risk criteria and is due to the risk that unsubordinated termination payments that may need to be made to defaulting derivative counterparties.

S&P also “weak links” the rating of the covered bonds to the rating of the European Central Bank (AAA) because CFFL holds cash at the French central bank, whose creditworthiness is in S&P’s view equivalent to that of the ECB.

Fitch on Friday said that the change in ownership of Dexia MA has no impact on the rating of its covered bonds. Fitch rates the obligations foncières AAA, but kept them on negative review, albeit stating that this was solely driven by its new criteria for the credit analysis of portfolios consisting of exposures to European public entities.

The rating agency said that it expects CFFL to activate its obligations foncières programme in the coming months, and that it will no longer consider the programme to be in wind-down.

Fitch’s anticipation of the programme being managed in a wind-down mode had led it to place the obligations foncières on Rating Watch Negative.