A French 2014 draft finance law would amend treatment of a key interest rate such that Caffil parent Société de Financement Local would avoid risks associated with loans made by predecessor Dexia Crédit Local (DCL) that are the subject of litigation, according to Moody’s. Meanwhile, Fitch affirmed CIFD’s rating.

Palais Bourbon, seat of the French National Assembly

A court in February ruled against Dexia in a case involving structured loans made to a French local authority. While it cleared Dexia of any wrong-doing, the court censured DCL for the way in which the Effective Annual Percentage Rate (TEG) was referenced in, or omitted from, loan documentation, said Moody’s.

“As a result of this decision, the rate applied to loans (often referred to as ‘toxic’, given their complex structure) was to be amended and replaced by the so-called ‘legal interest rate’, which is much lower than the contractual rate on the TEG-referenced loans,” said the rating agency.

“Apart from the DCL case, SFIL was concerned about the risk of contagion to its entire portfolio, which would have had material implications on its financial situation and its ability to do business with French sub-sovereigns. As a result, DCL appealed the legal decision and SFIL lobbied the government to have the legal framework amended.”

According to Moody’s, if the court decision is confirmed it will set a precedent that will involve a rate change for many loans that SFIL inherited from Dexia. The rating agency noted that since the judgement, litigation proceedings have tripled to 196 and 96 cases, respectively, for SFIL and DCL.

However, Moody’s said that the 2014 draft finance law, submitted to the National Assembly last Wednesday, includes a provision that will eliminate the risks surrounding TEG documentation for the lenders.

It is understood that this provision would allow the contractual rate to remain applicable even if the TEG was incorrectly referenced or omitted from certain documentation, as happened in the DCL case, meaning that the ‘legal interest rate’ would not apply. In cases where there was an error in the calculation of the TEG in the documentation, with a TEG below the actual TEG, the bank would be required to pay compensation equal to the difference between these two rates. [Amended to clarify the implications of the draft legislation for this scenario.]

“Given the role assigned to SFIL by the French state as a specialized lender for regional governments and public hospitals, the measure is also credit positive for the sub-sovereign sector as a whole,” said Moody’s. “Even if the court judgment was favourable for a minority of local governments that contracted risky loans, the legal risks for SFIL could have had serious negative implications for its capacity to provide lending to the broader sub-sovereign sector.

“If adopted, the law will certainly enable SFIL to meet its business objective of lending Eu3bn to the sub-sovereign sector in 2013, and up to Eu5bn going forward out of the sector’s annual financing needs of Eu20bn.”

CIFD affirmed on ‘extreme likelihood’ of continued support

Fitch affirmed its A issuer default rating of Crédit Immobilier de France Developpement (CIFD) on Thursday, while withdrawing its ‘f’ Viability Rating.

The Viability Rating was withdrawn because CIFD cannot be meaningfully analysed on a standalone basis any longer. “It is an institution in run-off,” it said, “and relies on extraordinary support to meet its financial liabilities.”

Fitch said the IDR affirmation reflects its opinion that it is “extremely likely” CIFD will continue to be supported by the French authorities.

“In Fitch’s opinion, extraordinary support has been provided in the interests of preserving financial stability in the French banking sector (CIFD is a major issuer of covered bonds),” the rating agency said.

CIFD is being provided with extraordinary support in the form of a temporary Eu8bn guarantee of senior debt issues (of which Eu5.4bn is being utilised), noted Fitch.

“Final EC approval for CIFD’s state aid is due by end-November 2013 and Fitch’s base case is that some form of orderly wind-down plan will be approved, given the bank is no longer competing with other banks and in light of precedent,” it said.

RBS analysts said that, with the affirmation of CIFD, the risk of downgrade of CIF Euromortgage’s obligations foncières has abated.

“Fitch had highlighted in its previous ratings report that any downgrade of CIFD would lead to similar action on CIF Euromortgage’s OF,” they said. “Affirmation of CIFD should prove credit positive for CIF Euromortgage’s OF, albeit in the short term.”