Dexia is to appeal a French court judgement under which the interest rate on three structured loans that are in the cover pool of CAFFIL would be reduced, it announced yesterday (Thursday), with analysts at one bank suggesting a negative ruling could have implications for other lenders.

The case involves three structured loans totalling Eu178m made to the Département de la Seine-Saint-Denis, which the Conseil Général de la Seine-Saint-Denis had argued were mis-sold by Dexia and should be cancelled, with compensation paid. The Superior Court of Nanterre on 8 February rejected these claims, saying that: Dexia had signed loan contracts (and not financial instruments) with the Département; the loan contracts were not speculative, but lawful and compliant with regulations; the Département was competent and had full knowledge of the facts; and Dexia in no way lacked in its duty to inform and advise the Département.

However, the court ruled that because the Effective Annual Percentage Rate was missing in faxes that were sent ahead of the execution of final contracts, the legally applicable rate (the Taux Effectif Global, TEG) should prevail. According to a covered bond analyst, the interest rates payable on the loans were initially low but then rose.

This interest rate that would be applicable under the ruling is understood to be significantly lower than that hitherto charged on the loans, which are now in the cover pool of Caisse Française de Financement Local (CAFFIL), the successor entity to Dexia Municipal Agency. CAFFIL’s parent is Société de Financement Local (SFIL).

“As the loans referred to in the court’s decision fall within the scope of the disposal of the Société de Financement Local, and if the judgement is confirmed it will have no financial impact for the Dexia Group, as the assets sold are now carried by the Société de Financement Local,” said Dexia. “If the High Court‘s decisions were to be confirmed and were to become established case law, their extension to other Dexia financing is likely to introduce significant risks.

“Dexia Crédit Local SA plans to appeal these decisions.”

Some observers have suggested that the court’s ruling was inconsistent, saying that on the one hand it found the Département to be a well informed party, but on the other applied the TEG, which is a rate designed to protect retail clients.

Natixis analysts on Wednesday highlighted the potential impact of a negative ruling.

“The loans concerned by the decision of the Tribunal are now part of the cover pool of CAFFIL, which if this decision were to be confirmed, would bear the financial impact linked to the decrease in the interest rate,” they said. “If the decisions of the Tribunal de Grande Instance de Nanterre on the absence of the TEG rate were confirmed and were to become jurisprudence, they might concern other loans from potential banks active in France, including CAFFIL, and could represent significant potential risks.”